Abstract
Post the 1930s Great Depression, the Global Credit Crisis (GCC) of 2008 saw the global economy experiencing another crisis where the financial systems of the world were on the verge of collapse. The crisis brought about heightened awareness and scrutiny over the accounting of financial instruments and the appropriateness of the accounting standard. The accounting standard at the time was International Accounting Standards (IAS) 39, which was a controversial accounting standard due to it requiring credit impairments to be based on an incurred loss model, which ultimately led to delayed recognition of provisions. However, to rectify the standards deficiencies, the International Accounting Standards Board (IASB) developed International Financial Reporting Standards (IFRS) 9, which would replace IAS 39. IFRS 9, with its effective date being 1 January 2018, introduced a new Expected Credit Loss (ECL) model that removed the reliance on loss events to recognise credit risk impairments. The new ECL model requires a new methodology of accounting for credit risk by requiring the incorporation of forward-looking elements to ensure more timely recognition of provisions. However, the ECL model brings about complexities of its own due to its high degree of estimation uncertainty given the level of judgement required and specialist skills to determine appropriate ECL levels. These accounting requirements are complex in nature and translate to enhanced credit risk disclosures required by users of the financial statements.
Given the increased accounting complexities brought about by the implementation of the IFRS 9 ECL model, enhancements have been made to the credit risk disclosures provided to the users of financial statements. This study analyses if South African banking institution’s credit risk disclosure practices are able to provide financial information that is useful to users, such as investors, lenders, and creditors. This is performed by investigating credit risk disclosure practices in terms of their appropriateness, precision level, and decision-making usefulness.
To achieve the outcomes above, an empirical content analysis methodology was utilised to assess the sample of South African Johannesburg Stock Exchange (JSE) listed commercial banking institution’s annual financial statements for the 2020 financial period. The content analysis of the study is further expanded into a disclosure index, which focuses on assessing the existence of credit risk disclosures and a thematic content analysis to assess the quality of the disclosures.
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The findings of the disclosure index study highlighted that the South African banking institutions all have 100% compliance on their credit risk disclosures as per the requirements of IFRS 7. Instances were identified where certain disclosures would not be disclosed due to them not being applicable given the underlying business models or accounting policies utilised by the banks. The results from the thematic content analysis illustrated that a majority of the credit risk disclosure practices were ‘exemplary’. Specifically, these disclosures highlighted characteristics of precision, appropriateness, and entity specificity, which led to the provision of credit risk information that is highly useful in nature for decision making purposes. Thus, these were determined to be appropriate for use as a benchmark for other entities preparing their credit risk disclosures. Where disclosures were not ‘exemplary’ in nature, recommendations were made within the conclusion of the study.
The study makes a contribution to the existing knowledge available for credit risk disclosure practices, as well as addressing a gap in existing research surrounding these practices post the implementation of the ECL model. The study will further provide value to the IASB in the post implementation review, as well as highlighting further research topics based on the results of the research performed.
Key words : Banks, Credit risk, Disclosure, Expected credit loss, Financial statements, Global Credit Crisis, IFRS, IASB, Incurred loss.