Value-Driving Activities in Euro-Zone Banks (original) (raw)
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The promotion of the international harmonisation of goodwill accounting has led to the approval of SFAS 141 and 142 and IFRS 3, IAS 36 and IAS 38. The aim was to improve the quality and comparability of financial statements through these standards by eliminating the pooling of interests method and substituting the application of amortisation with an annual impairment test. However, recent decisions by regulating bodies such as the FASB, the IASB and the European Parliament have compromised this harmonisation. Currently, steps are being taken to reintroduce systematic amortisation in conjunction with the impairment test. In this dual normative scenario, where two accounting methods coexist (impairment test or amortisation), we analyse the economic consequences of the application of one method over the other in the information transmitted by the firms listed in the Spanish securities market. The contrast of two periods, pre-IFRS (1998 to 2004) and post-IFRS (2005 to 2011), reveals that the application of either of these methods affects financial statements and the usefulness of the information. Therefore, the possibility of opting for one or the other could distort the quality and comparability of the information transmitted by firms and the accurate assessment of future cash flows.
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This study investigates average earnings quality (AEQ) and its determinants in the European banking sector based on data of 409 European banks from the period 2006-2018. We utilize the intensity of fair valuation, average annual interest change, and firm size as explanatory variables for AEQ, with special attention to differences between developed and emerging countries. We split the total time period into a pre-IFRS 13 and a post-IFRS 13 period to examine how the renewed regulation of fair valuation (IFRS 13) has affected the earnings quality of banks. We find that, while the interest change observed in the total period and the banks' size significantly and negatively affect AEQ, the proportion of fair value assets has a significant positive effect. We show that the latter is only valid for developed countries. We find clear evidence that the introduction of IFRS 13 resulted in a measurable improvement in fair value regulation.
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Bank Risk and the Value Relevance of Fair Value Gains/Losses
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This paper studies the value relevance of fair value gains and losses for an international sample of banks. We study the before crisis and crisis periods. Logically it is possible for the increased subjectivity associated with the implementation of fair value accounting in highly risky situations to result in fair value numbers that are less value relevant. On the other hand it is logically possible that investors will find well implemented fair value estimates more useful for banks with more risky business models. Using hand collected data we construct a bank returns model that splits the loan losses and profits before taxes of banks by line of business (retail versus corporate). The main finding of the paper is that the value relevance of fair value gains and losses is positively related to the level of bank risk prior to the crisis. During crisis, there is some evidence of the same positive relationship but the results are weaker given the changing risk environment. In addition we find that the fair value gains/losses of banks that elect to use the fair value option for assets that could have been accounted for in terms of amortized costs are more value relevant and persistent. From a policy viewpoint our results suggest that the fair value gains and losses of banks should be separately accounted for according to line of business.
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Journal of Business & Economics Research (JBER), 2011
This paper examines goodwill on corporate balance sheets. Specifically, the paper measures the extent to which goodwill exists on corporate balance sheets and the degree of goodwill write-downs that have occurred recently. We report on our study and a study by Intangible Business, which show that many firms carry substantial amounts of goodwill on their 2008 balance sheets. Thus, because of the recent downturn in the economy and the markets, the potential for big bath earnings management for 2008 and 2009 exists. In addition, because of reductions in expected returns on pension plan assets, many firms are likely to record much higher pension expenses. We expect that the combination of goodwill impairments and increased pension expense will have significant effects on both the amount and the quality of earnings for 2008 and, possibly, 2009.
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We investigate the risk relevance of the standard deviation of three performance measures: net income, comprehensive income, and a constructed measure of full-fair-value income for a sample of 202 U.S. commercial banks from 1996 to 2004. We find that, for the average sample bank, the volatility of full-fair-value income is more than three times that of comprehensive income and more than five times that of net income. We find that the incremental volatility in full-fair-value income (beyond the volatility of net income and comprehensive income) is positively related to market-model beta, the standard deviation in stock returns, and long-term interest rate beta. Further, we predict and find that the incremental volatility in full-fair-value income (1) negatively moderates the relation between abnormal earnings and banks' share prices and (2) positively affects the expected return implicit in bank share prices. Our findings suggest full-fair-value income volatility reflects elements of risk that are not captured by volatility in net income or comprehensive income, and relates more closely to capital-market pricing of that risk than either net-income volatility or comprehensive-income volatility.