Financial instruments under the IFRSs: A comparative study between the early adoption of IFRS 9 and its precedent standards set in commercial banks in the Middle East

International Financial Reporting Standard 9: Financial Instruments (IFRS 9) is considered a major development in the financial reporting field. This is because of its considerable financial reporting coverage of the majority of a banks’ assets. International Accounting Standard Board claimed “IFRS 9 both helps users to understand and use the financial reporting of financial assets and eliminates much of its complexity in International Accounting Standard 39 (IAS 39)”. Some of the commercial banks in the Middle East adopted the first stage: classification and measurement of the IFRS 9 early in 2011. Changes in labels comprehensively incorporates influence on financial instruments’ reporting in relation to both presentation and disclosures, which affects investors’ judgments and economic decisions. The cost of equity theory is based on the idea that the value of the firm equals the discounted anticipated benefits, such as dividends. Therefore, from an investor perspective, the firms’ value is affected by forward-looking information, which is based on financial reporting outcomes. Consequently, this thesis empirically compares the effect of the classification and measurement stage under IFRS 9’s early adoption (POST period) with the precedent standards set, IAS 32: Financial Instruments: Presentation, IAS 39: Financial Instruments: Recognition and Measurement in addition to IFRS 7: Financial Instruments: Disclosures (PRE period). The empirical comparison primarily deals with two key streams; value relevance and economic consequences. Value relevance is divided into two objectives; firstly, fair value disclosures which are examined using the Balance-Sheet Model (BSM) and, secondly, derivatives fair-value recognition which is examined based on Ohlson’s (1995) model. Economic consequences are reflected using the cost of equity (CE) measured by three methods (Claus and Thomas, 2001; Gebhardt, Lee and Swaminathan, 2001; Gode and Mohanram, 2003) in addition to the average. CE is examined by both univariate and multivariate analyses. The study period covered ten financial years: five years PRE and five years POST incorporating 22 commercial banks and 110 bank/year observations for each period in the Middle East. Findings supported the IASB’s claim relating to the classification and measurement stage under IFRS 9 for value relevance and the cost of equity. Fair value disclosures for financial instruments were found to be value relevant in both periods, except for loans. However, loans are value relevant only in banks which are financially healthy and resident in peaceful countries under PRE IFRS9. Derivatives fair-value recognition was found to be value relevant only for trading type and in the long term (10 year period). Additionally, only using the average, there was a significant inverse relationship between CE and the early adoption of IFRS 9. Furthermore, the central bank’s intervention significantly decreased the cost of equity by 115 basis points; however, banks which adopted IFRS 9 voluntarily faced a lower CE, such as in Bahrain and Lebanon.