Have financial analysts understood IFRS 9? A critical appraisal of the impacts of the new impairment rules on analysts’ current forecast accuracy and forecast revision behaviour for banks in Europe

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Schoenleben, Dennis
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MSc International Accounting and Finance
Dublin Business School
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Purpose – The purpose of this study is to examine whether the prospective mandatory change in the International Financial Reporting Standard (IFRS) for financial instruments from IAS 39 to IFRS 9, with regard to impairment rules, is known by analysts currently making estimates about banks in Europe, and whether it is fully reflected in their current forecasts. Literature review – A wide range of literature was analysed to attain knowledge about pre-existing theories with reference to accounting changes and their impacts on (1) analysts’ forecast revision behaviour, and (2) forecast accuracy during pre-adoption periods. Moreover, by reviewing impairment methods, IAS 39’s incurred loss model and the expected loss model prescribed by IFRS 9, a basis for understanding the implications of this impairment-method change on banks’ financial statements is provided. Finally, the literature chapter discusses studies previously conducted which quantify the expected transitional impacts caused by the impairment method change on banks’ loss allowance. Design / methodology / approach – To address the complexity involved and to fulfil the research goals, a case study approach was adopted as the research method, aimed to holistically test whether certain theories apply to changes in the particularly-complex accounting standard IAS 39 for real-life situations for the five largest banks in Europe. Aside from previous studies, this thesis assesses forecast accuracy between the researchers’ own estimates and published analyst forecasts. Findings – The empirical results indicate that the impairment change currently plays a more subordinated role in analyst forecasts for these five banks than other factors. In addition, results hint that analyst forecasts for these five banks are likely to be significantly revised in the near future. Research limitations – Caused by the forward-looking nature of this research, findings within this study are biased by subjective judgements made by the researcher, as well as by the availability of public data at the time this research was conducted. Furthermore, due to the characteristics of a case study approach, the samples selected within the research are not to represent the population as a whole, thus insights are limited to these particular cases. Originality/value - This research suggests that because of the subordinate role played by the new impairment rules in analyst forecasts, falling stock prices will more than likely materialise for banks in the near future due to IFRS 9. By selecting own estimates to determine forecast accuracy, the researcher aims to enhance the practical value of this research and to encourage scholars to apply more real-life approaches when conducting research. Author Keywords: IFRS 9; market reaction; analysts’ forecast accuracy; analysts’ forecast revision behaviour; accounting change