Earnings smoothing and the shift from actual loan loss provision to expected credit loss

Abstract

After the 2007 financial crisis, protecting the stability and resilience of the financial system is still a matter of concern in academic literature and the industry. The crisis highlighted the shortcomings in the accounting of financial instruments. As a response to the deficiencies, the International Accounting Standards Committee (IASB) developed and published International Financial Reporting Standard 9 (IFRS 9) on financial instruments. The standard was published in 2014 and came into force on January 1, 2018. One of the main reasons for the adoption of IFRS 9 was to address the negative impact of inappropriate credit losses in financial statements. IFRS 9 provided a complete change in the accounting of loan loss provisions, introducing an expected credit loss model compared to the previous loss model based on International Accounting Standards 39. This study examines whether the implementation of the accounting change from loan loss provisions to expected loan loss provisions provides space for compensation of revenues. The study used a quantitative study design, monthly data from all 19 commercial banks in Zambia registered with the Bank of Zambia at the time of the study was analyzed by regression. The results do not show any evidence of a smoothing of revenues both before and during the period of implementation. This research contributes to the current debate between accounting professionals and researchers on whether IFRS 9 contributes to smoothing of the company's revenues.