Accounting for financial instruments: regulations and banks’ behavior in light of IFRS 9

This paper provides an analysis of the principal differences between IAS 39 and IFRS 9 and examines the main impacts of the latter standard on banks’ Regulatory Capital. It also undertakes a critical review of the main literature about the economic consequences of classification, measurement, and impairment of financial assets. We examine two broad streams of literature. While the former stream explores how different measurement bases for financial instruments affect the relevance and reliability of financial accounting information, the latter discusses the evidence related to the discretionary use of accounting provisions and its effects on the banks’ financial statements. The main arguments of the accounting analysis correspond to i) the IFRS 9 treatment of FVTPL assets as a residual category, and ii) the introduction of Stage 2 for the impairment of financial assets which have experienced a significant deterioration in credit quality. Based on the empirical evidence of the aforementioned literature, we conclude the paper by offering some recommendations for future research.