ABSTRACT:
The 2008 global financial crisis and the sovereign debt crisis have highlighted the weaknesses of the impairment model regulated in the accounting standards in force at that time (incurred-loss model) as well as the late recognition of losses on financial assets. Noting the problem, both the IASB and the FASB have launched a process of reviewing the rules governing the recognition and measurement, impairment and hedge accounting by issuing in 2014 (IASB) and 2016 (FASB) two new accounting standards on financial instruments. Among the various innovations, these principles have introduced a new impairment model for financial assets that recognizes the expected losses and not only those already manifested (i.e., incurred-loss model). This work has two objectives. The first one is to assess, on a theoretical level, whether the new impairment model improves the quality of the information available for the financial reporting users. The second is to provide empirical evidence of the impact produced by the IFRS 9 first-time adoption at the beginning of the transition year, with a particular focus on the new impairment model, indeed. To achieve this objective, the paper analyses a sample of 163 European financial entities that has adopted IFRS 9 at the beginning of fiscal year 2018. The paper contributes to the literature for at least twofold. First, the paper systematizes the pros and the cons of the new impairment model. On the one hand, it allows for timely losses recognition; on the other hand, the new model increases the probability to carry out earnings management behaviour by the management of the firms. Second, it provides first empirical evidence that most of the transition effects are due to the new expected loss model.
KEYWORDS: Financial instruments, Impairment, IFRS 9
