Credit Loss Accounting and Value Relevance: A Comparative Study of Accounting Standards in European Banks

Abstract: By comparing the value relevance of the incurred credit loss model under IAS 39 and the expected credit loss model under IFRS 9 we investigate whether the IASB has succeeded with its goal of improving accounting relevance and quality through the implementation of IFRS 9 and contributed to investors gaining better and more relevant information. Using a modified version of the Ohlson (1995) valuation framework on a sample of 163 European banks (3 756 unique observation) between 2010 and 2020, we find that credit loss accounting under IFRS 9 is more value relevant than under IAS 39, and that the IASB thus has succeeded in this regard. We contribute to current accounting literature by providing the first empirical testing of the value relevance of items related to the impairment models specifically where we can conclude that the improvement stems from the new impairment model while the new classification of financial assets in IFRS 9 has had limited, if any, effect on the overall value relevance of accounting.