Investigating the effect of change in loan loss provisioning method on financial reporting quality of banks

Abstract

The aim of this study is to investigate the effect of change in the accounting method of calculating bank loan loss provisions on financial reporting quality of banks. In order to do this, the current theoretical literature on the topic of the research has been described and the conflicting opinions of the previous researches have been expressed. In the following, by use of the transfer matrix method, loan loss reserves have been calculated for sample of 17 banks assuming the method approved by international accounting standards (expected credit loss model) have been applied. Then, the information of the research variables from 2017 to 2021, with two assumptions of using the current method and using the expected credit loss model, has been collected and analyzed, and the research hypothesis has been tested using the least squares method. The results of the research showed that the relationship between the change in the reporting system and discretionary accruals as an indicator of the financial reporting quality is negative and significant. So, change in the current accounting methods that used for calculation of loan loss reserves causes reduction of discretionary accruals and improvement of financial reporting quality. On the other hand, results of this research showed that large banks are more interested in using discretionary accruals and applying profit management than small banks, which can be caused by "political costs theory".

Keywords

• ifrs
• banks financial reporting quality
• expected loss model
• discretionary accruals