Long and Short‐term Investments by European Banks – Trends Since the IASB Published IFRS 9

Abstract

IFRS 9 was introduced by the IASB in 2014 with a mandatory application in 2018. Three years later the IASB started a post‐implementation review project. Major concerns at a political level and from the (insurance) industry were raised about long‐term investment strategies that appear less favourable due to new measurement categories and impairment rules. Furthermore, it was expected that the new rules on categorisation would create more profit or loss (P/L) volatility. We show that concerns about banks' decreasing maturity investment behaviour and increased profit or loss volatility since the publication of IFRS 9 in 2014 could not be verified until 2020. Additionally, banks hardly use the fair value option in practice, which suggests it can be abolished. Finally, the paper finds that the fair value through other comprehensive income option for equity instruments has almost no importance for banks. The IASB should, therefore, abolish this category as well. Hence, the measurement categories could be reduced by two categories reducing complexity and increasing the decision usefulness of financial instruments accounting rules for investors.

Research on Application and Impact of IFRS 9 Financial Instruments

“…Many of these related to disclosure or presentation issues, which were identified by the respective research teams when they encountered difficulties in gathering data from published financial reports. For example, as part of their recommendations, Löw and Erkelenz (2022) suggest that to ensure greater transparency and comparability between banks, a standardised and mandatory disclosure of the residual maturity breakdown for financial assets should be included in IFRS 7. Overall, the combined findings of these studies provide evidence that is helpful to the IASB in reaching conclusions in its PIR of IFRS 9 classification and measurement.…”

“…From this population, they have 109 firms pre IFRS 9 and 111 firms post IFRS 9 that have equity financial assets. Löw and Erkelenz (2022) examine potential consequences in the banking industry caused by IFRS 9. In particular, they examine concerns that IFRS 9 would create less favourable long-term investment strategies and that it would result in more profit or loss volatility.…”