Essays on IFRS 9 Hedge Accounting

Abstract

My dissertation addresses the requirements on hedge accounting during the transition from IAS 39 towards IFRS 9. The work is motivated by the ongoing and extraordinary transition period in which the IASB grants firms to choose between the equally acceptable hedge accounting models of IAS 39 and IFRS 9. With IFRS 9 hedge accounting, the IASB aims to align hedge accounting more closely to firms’ risk management activities. The dissertation consists of my three single-authored studies framed by an Introduction and a chapter on Summary, Discussion and Outlook. In the first study, I analyze the consequences of cash flow hedge accounting on portfolio earnings of firms focusing on main changes between IFRS 9 and IAS 39. For this purpose, I develop a simulation study which illustrates the quantitative effects on the accounting entries according to the currently applicable hedge accounting methods. It is especially addressed what accounting differences arise and how these distinctions may affect a firm’s earnings. Furthermore, I examine to which firms early switching becomes especially desirable or burdensome. The paper shows that portfolio earnings are affected differently. Additionally, sensitivity to volatility changes varies among the methods. Moreover, a partly ineffective hedging relationship does not necessarily decrease earnings compared to its fully effective counterpart. In the second study, I analyze the hedge accounting practices of German non-financial, listed firms using a hand-collected data set of hedge accounting practices. I focus on firms’ decision to apply IFRS 9 or IAS 39 hedge accounting rules during IFRS 9 introduction. Two hedge accounting regulations are co-existing in the market. Therefore, the setting suits to reveal firm preferences. I show that approximately 75% of hedge accounting applicants opt for IFRS 9. IFRS 9 hedge accounting users designate significantly more hedging relationships to reduce commodity and interest rate risk exposures and designate fair value hedges on a significantly larger scale. The tremendous increase in hedge accounting for commodity risk exposures might even indicate possible real effects. Additionally, the results show that IFRS 9 users are greater in size and have lower levels of asymmetric information. In the third study, I analyze whether the voluntary adoption of IFRS 9 hedge accounting and the mandatory application of the related disclosure requirements of IFRS 7 impact sell-side analysts’ earnings forecast quality. I measure forecast quality through forecast dispersion and error. The measures serve as proxies for information asymmetry. Using a German sample of non-financial firms, I find no statistically significant differences in forecast quality between IAS 39 and IFRS 9 hedge accounting applicants. Also, the economic differences are relatively small. A further analysis on bid-ask spreads confirms my results. Based on these findings, hedge accounting according to IAS 39 and IFRS 9 seems to have similar informational effects on external stakeholders. The work is particularly interesting for standard setters. Even though the studies underlying this work do not clearly indicate whether or not the IASB succeeds with its objective to align hedge accounting more closely with risk management activities, they provide first insights regarding the hedge accounting practices of non-financial firms during the transition from IAS 39 towards IFRS 9 and raise further demand for research.