The Impact of Credit Risk Reporting Rules on Financial Analysts' Information Environment

Majority of the prior research in the area of loan loss accounting has been based on the examination of previous loan loss accounting model – the IAS 39 Incurred loss model, or on the exploration of theoretical implications under the proposed forward-looking model by both International Accounting Standards Board and Financial Accounting Standards Board. This thesis examines the informativeness of the IFRS 9 Expected loss model in the European Union using both primary and secondary data investigations. This research is one of the first studies to investigate informativeness of credit risk reporting under the IFRS 9 Expected loss model implemented by the International Accounting Standards Board in January 2018. Therefore, the area of loan loss accounting under IFRS 9 remains significantly under researched; with majority of studies examining the model descriptively using case studies. Furthermore, the large proportion of existing research evaluate the IFRS 9 Expected loss model through the conceptual lens, by illustrating limitations of the previous model and the improvements implemented within the new model. Given the lack of substantial evidence on the usefulness of the new model for loan loss accounting using large data samples, the current study undertakes the work on this topic to provide a comprehensive clarity in the context of credit risk reporting. As a result, this study arrives at a firm conclusion about the informativeness of the IFRS 9 Expected loss model in the European Union. For the purpose of this thesis, both primary and secondary data investigations were adopted. Firstly, the accounting data for the sample of 570 EU banks over the period from 2012 to 2016 were analysed to establish whether loan loss provisions determined in accordance with the IAS 39 Incurred loss model or IFRS 9 Expected loss model report greater ability to predict future credit losses. The secondary data analyses further investigate whether the presence of audit specialist, bank’s size and bank’s credit rating impact the predictive ability of loan loss provisions. Secondly, 107 survey questionnaires were completed by accounting and finance scholars and practitioners to ascertain their opinions about loan loss accounting in the context of the change implemented by the new forward-looking model – the IFRS 9 Expected loss model. To address these questions number of research methods were adopted. The results of secondary data analyses document that loan loss provisions determined in accordance with the IFRS 9 Expected loss model have superior predictive ability to estimate future credit losses when compared to the predictive ability of loan loss provisions projected in accordance with the IAS 39 Incurred loss model. Further investigations provide evidence that the predictive ability of loan loss provisions is affected by a bank’s credit position; the statistical evidence identifies a positive relationship between institution’s credit ranking and its loan loss provisions’ predictive ability. However, the bank’s size and the presence of audit specialist have no significant impact over the ability of loan loss provisions to estimate future loan losses. Overall, the results suggest that the forward-looking model may exhibit greater informativeness in the context of credit risk reporting. The results of survey questionnaires suggest that the IFRS 9 Expected loss model provides superior information in terms of accounting prudence and the ability to incorporate expected future events into current loan loss provisions. Furthermore, the most common limitations of the IAS 39 Incurred loss model highlighted by survey respondents related to its limited timeliness and insufficient ability to provide for existing credit losses. Overall, the findings confirm the superiority of IFRS 9 Expected loss model to provide relevant accounting information for credit risk assessment purposes. These findings may have useful implications for future development of accounting standards related to loan loss accounting; accounting standard setters and users of financial statements may seek comprehensive evidence on the usefulness of current standard for credit risk reporting