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Date: 03-01-2011Student number: 259128

Coach: E. A. de Knecht RACo reader:

Table of Contents

Table of Contents.....................................................................................................................................2

Chapter 1: Introduction.............................................................................................................................4

§ 1.1 Background............................................................................................................................4

§ 1.2 Research Question...................................................................................................................5

§ 1.3 Research Methodology............................................................................................................7

§ 1.4 Structure.................................................................................................................................8

§ 1.5 Demarcation and limitations.....................................................................................................9

Chapter 2: Financial statements...............................................................................................................10

§ 2.1 Introduction..........................................................................................................................10

§ 2.2 Agency theory.......................................................................................................................11

§ 2.3 Financial accounting..............................................................................................................12

§ 2.4 Accounting principles............................................................................................................14

§ 2.5 Risk Reporting......................................................................................................................16

§ 2.6 Summary..............................................................................................................................18

Chapter 3: IFRS 7..................................................................................................................................19

§ 3.1 Introduction..........................................................................................................................19

§ 3.2 Content of IFRS 7.................................................................................................................19

§ 3.3 Summary..............................................................................................................................27

Chapter 4: Literature review....................................................................................................................28

§ 4.1 Introduction..........................................................................................................................28

§ 4.2 Literature review...................................................................................................................28

Cabedo & Tirado....................................................................................................................28

Groenland, J., Daals, R., Eije H................................................................................................32

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Bischof, J................................................................................................................................34

KPMG, Ernst & Young, PricewaterhouseCoopers......................................................................36

Objective and research questions..............................................................................................38

§ 4.3 Summary..............................................................................................................................41

Chapter 5: Empirical research.................................................................................................................43

§ 5.1 Introduction..........................................................................................................................43

§ 5.2 Methodology.........................................................................................................................43

§ 5.3 Approach..............................................................................................................................46

Selected population.................................................................................................................46

Chapter 6: Results..................................................................................................................................47

§ 6.1 Introduction..........................................................................................................................47

§ 6.2 Results.................................................................................................................................48

§ 6.3 Summary..............................................................................................................................62

Chapter 7: Summary and Conclusion.......................................................................................................64

§ 7.1 Summary and conclusion of the Master Thesis.........................................................................64

§ 7.2 Limitations and recommendations for future research...............................................................66

Literature...............................................................................................................................................68

Appendix I............................................................................................................................................71

Appendix II...........................................................................................................................................72

Appendix III..........................................................................................................................................74

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Chapter 1: Introduction

§ 1.1 Background

Many aspects in financial reporting have changed since the first set of financial statements has

been published. Were the balance sheet, profit and loss statement and cash flow the most

important statements in the past, currently the disclosures are an integral part of the financial

statements and the requirements for these continue to grow. The first step to this was the

introduction of the International Financial Reporting Standards (IFRS) in 2001, which aligned

the reporting standards of the European public companies.

After 2001, IFRS requirements continue to develop and in 2006 the financial statements have

reached an average length of 85, compared to 45 in 1996 (Deloitte, 2006).

In my short experience at a large audit firm, I too have noticed the growth of the financial

statements and the increase in the IFRS requirements, resulting in more questions from the

stakeholders on in which way to read these statements.

The most recent page increasing development in IFRS is the 2004 standard “IFRS 7 Financial

Instruments: Disclosures”. This new standard applies to all companies that have financial

instruments and requires additional disclosures relating to the risk associated with these,

management responses and a sensitivity analysis. This information should provide the

stakeholders insights in the risk management system of the company and should provide a

better understanding of the risks associated with the company’s financial instruments. This

standard was the result of the increased complexity and environment of our current financial

environment.

A recent study of the influence of IFRS on the value relevance on the earnings showed no

significant value relevance (De Oude, 2009), also a less recent study performed by Groenland

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on the risk reporting1 by the Dutch firms showed no significant impact on the share price of the

selected Dutch companies (Groenland et al., 2006). Other research on specific IFRS 7

disclosure (Bischof 2009) showed a significant impact of IFRS 7 risk disclosures on the quality

of the risk disclosures.

The objective of the financial statements is to provide the stakeholders with sufficient

information on which they can base their investment/credit decisions on. And IFRS 7 does

provide more information on the risks related with the company’s financial activity, it is though

questionable whether this additional information, and perhaps even more in the future, will not

cause an information overload which was already a worry in 2007 (Radin, 2007).

The purpose of this master thesis is to perform a research on the IFRS 7 risk disclosures

developments after the implementation period in 2007, its evolution in the financial statements

and the impact on the annual report.

§ 1.2 Research Question

The main objective of this research is to investigate the development of IFRS 7 risk disclosures

on the financial statements of the Euronext listed, Large Caps2, Financial companies.

The main research question of the research is:

What are the developments of the IFRS 7 risk disclosures in the financial statements?

In order to be able to answer the primary research question, sub questions are formulated:

1. What are financial statements and what purpose do they have for the shareholders?

2. What is IFRS 7 and what is its purpose?

3. What impact has risk reporting had on the financial statements?

1 Code Tabaksblat was the best practice in the Netherlands relating to risk reporting of the listed companies and was less extensive than the IFRS 7 requirement

2 Large Caps is Compartment A of Euronext, other compartments are B (midcaps) and C (small caps)

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4. What impact have the IFRS 7 risk disclosures had on the financial statements after its implementation?

The research is based on large caps companies listed on the Euronext, as this is one of the

largest stock exchanges in Europe. IFRS is obliged for companies that are listed on a European

stock exchange, and consequently all companies listed on the Euronext have to comply with

IFRS, making this research possible. The sector chosen to do research on is financial sector, as

this sector is more likely to have more financial instruments than any other sector, and value

relevance of these disclosures is expected to be the highest in this sector.

The first research question for this research has the focus on the financial statements, it is

important to investigate what financial statements are and what their purpose is for the

shareholders. By performing this research, based on available literature, the object of research

for the main question is defined. The second research question relates to IFRS standards and

specifically the IFRS 7, where the standard requirements are investigated in order to understand

what the requirements are, making it possible to include the relevant factors of the standard in

the research. The third research question, the effects of risk reporting on financial statements is

formulated in order to perform literature review on the risk reporting and IFRS 7 reporting after

its implementation. This research forms the basis for the empirical research performed in order

to answer the fourth research question. This research question will be answered by performing

an empirical research on the financial statements and the reported IFRS 7 risk disclosures in

these financial statements. The selected years are representing the first year of IFRS 7

implementation and two years following. By performing this empirical research, the evolution,

if any, in risk reporting in the financial statements is investigated for its significance in both

quantity and quality.

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§ 1.3 Research Methodology

This chapter describes in which way the research will performed per research question and in

order to keep the research academically relevant, which methodology will be used and which

sources will be used.

The first question, relating to the value relevance and purpose of the financial statements is to

be answered based on a literature study. The purpose of this research question is, as signaled in

the previous chapter, to identify the purpose of the financial statements for the shareholders and

to define the object of the research. It is based on the information from the financial statements

further research will be performed, and is therefore important to understand what financial

statements are and which purpose it serves.

Answering the second question, by performing a content analysis of the IFRS standard, will

provide insights on IFRS 7 and in which way these requirements are implemented in the

financial statements. First IFRS as a whole will be explained and the context of it, after which

IFRS 7 will be commented to note which elements of the financial statements, are to be

examined.

As IFRS 7 is a risk reporting disclosure requirement, literature study is performed on risk

disclosures. Previous studies have been performed in the past relating to risk reporting and

models have been developed to capture and measure risk reporting. The literature study on risk

reporting is to result in the selection of model(s) after which a content analysis on the financial

statements for Euronext companies is to be performed based on the recommendations of Duriau

(Duriau et al., 2007). In this research, different content analyses are commented and based on

the research of prior content analyses; recommendations are made relating to future content

analyses.

The fourth research question is answered by performing an empirical research on the financial

statements of the selected companies. The empirical research has the purpose to investigate

whether or not the selected companies disclose the IFRS 7 risk requirements and whether the

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quality of the disclosures has improved, or changed, during the period between the

implementation and 2009.

Answering the before signaled questions, will provide useful information and results based on

which a conclusion can be drawn and the main question of the research could be answered.

§ 1.4 Structure

The purpose of this chapter is to elaborate the structure of the thesis. The first five chapters are

based on the sub questions of the research. The thesis starts with chapter ‘Financial Statements’

where a literature study on the purpose of the financial statements and its relevance is

performed. This chapter provides background in which way the financial statements are

prepared and read, who the users are and what the developments have been in the past decades.

An introduction to IFRS 7

The ‘IFRS 7’ chapter discusses the background of IFRS 7, relevant factors of IFRS 7 and

recent amendments. The purpose of this chapter is also to explain, based on financial

statements and recent studies, in which way IFRS 7 has influenced the financial statements of

the companies and what the standard requires to be reported in the financial statements.

Chapter 3 presents a literature study on recent risk reporting studies and IFRS 7 risk reporting

study. The purpose of this chapter is to investigate the recent findings on risk reporting, and

specifically IFRS 7 risk reporting, and to use the studies for the development of the research

model performed in the next chapter. This chapter also enables this study to perform follow-up

a follow-up study on the development after the implementation of IFRS 7 in the financial

statements, as recent studies currently do not go further than the implementation of IFRS 7.

Empirical research is performed in chapter 4, based on the selected Euronext listed companies

for the years 2007-2009 and their IFRS 7 risk reporting. In this chapter the methodology for the

research and research methods are explained, following by results of the research in chapter 5.

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Finally, the ‘Summary & Conclusion’ chapter concludes the research and the research

questions.

§ 1.5 Demarcation and limitations

This Master Thesis is primarily based on the risk disclosures of IFRS 7. It is to be noted that

IFRS 7 contains more than risk disclosures only, but are not part of the research. Example of

the IFRS 7 disclosure requirements, not being part of this research, are the valuation disclosures

of the financial assets and liabilities explaining the level category of the valuation

methodology.

The reason only risk disclosure in this research is included is the fact that these requirements

have been part of IFRS 7 since the first adoption of the standard and the track record of this

disclosure consequently is present in all the selected years. Furthermore these disclosures have

had the time to evolve in the financial statements during the years.

The selected companies for the research, blue chips of the financial services industry, form the

demarcation of this research, as this research only focuses on these companies and the outcome

of this research could therefore differ when other companies and/or industry is selected.

The sample sizes and selected samples in this research, on which conclusions are based, are not

large enough to represent the total population of all IFRS financial statements and the

conclusions drawn in this research, are therefore only applicable to the sample selected.

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Chapter 2: Financial statements

§ 2.1 Introduction

The purpose of this chapter is to explain what financial statements are and in which way these

are prepared, the first research question of the thesis will be answered in the last section of this

chapter: What are financial statements and what purpose do they have for the shareholders?

The relevance of the financial statements for its users can be explained by the agency theory,

where a principal and agent relationship exists between the shareholders of the company

(owners) and the management of the company responsible for achieving the goals of the

shareholders. Shareholders of the company are not able to, and mostly don’t want to, be

involved in the day-to-day business, but are though interested in the performance of their

investment, which can be derived from the quarterly and annually presented financial

overviews by the management of the company. These financial overviews must have explicit

assertions (accounting rules) based on which these are prepared, in order to make the overviews

usable for the shareholders. Uniformity of these assertions could even make it possible for the

shareholders to compare their investment to other investments, which makes the use of

harmonized accounting principles sensible. Presenting not only numbers, but also explanation

on the numbers and views of the management on company’s performance and risks can provide

the readers of the financial statements more information on the amount of risk their investment

is exposed too. Based on this information the possibility will created to compare this to other

similar risk bearing investments and to put the performance of the company in a better

perspective.

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§ 2.2 Agency theory

The private corporation or company is a form of legal fiction which serves as a nexus for

contracting relationships and which is also characterized by the existence of divisible residual

claims on the assets and cash flows of the organization which can generally be sold without

permission of the other contracting individuals (Jensen and Meckling, 1976).

A (private) company is owned by its shareholders, which have contracted other individuals to

operate the company on their behalf. Consequently, the company can be qualified as a nexus

concerning individual goals, combined fulfilling the goals of the owners. In this context, the

agency theory can be applied to a company, revealing the principals (shareholders) and its

agents (employees/managers of the company).

The agency theory involves an agent, who has the intention to maximize his own benefit, and a

principal, who has hired the agent to make decisions for on his behalf, which should maximize

the principals’ benefit. This theory also explains that incentives from other sources that the

agents job, could cause the agent to shift his utilization to the job from where he benefits the

most from (Kunz, 2002).

What the agency theory concludes is that each individual (agent) has its own goals, which are

not consistently in line with the ones of the principal. It is therefore the job of the principal to

design incentives and punishments to align the goals of the agent to the goals of the principal. It

is therefore crucial for the principals to have sufficient (financial) information on which they

can base decisions on.

In his research, Noreen has characterized the agency theory situations as being a ‘sequential-

play game with uncertain and asymmetric outcomes’ (Noreen, 1988), meaning that the unlike

the prisoners dilemma (Noreen, 1988), the outcome (goals) are not always predictable and

aligned between the principal and the agent.

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Figure 1 – Agency theory (P: Principal, A: Agent)

The agency theory in addition is based on the information asymmetry, as the agents have access

to other/more information than the principal. For instance the agent, a CFO has access to

budgets and inside company information, while the principal, the shareholder, only has access

to public information among which are the financial statements. This information asymmetry,

combined with self-interest of the agent, would require a trust relationship between the agent

and the principal to fulfil the principal’s goals. The less trust there is between the two the more

the principals will seek for mechanisms to align the goals of the agents to theirs.

Concerning the principals, consequently it is important that the information that is received is

complete. Financial statements with numbers only, will provide the insights on the performance

of the company, but without any disclosures on in which way the company is being run and

which risks by the agents are being taken, the decisions of the principals could be based on

wrong and incomplete assumptions.

§ 2.3 Financial accounting

Based on the paper of Jensen and Meckling from 1976 by Watts and Zimmerman the Positive

accounting theory have been developed explaining that the managers will act in their self-

interest and will apply the accounting rules that will benefit their own interest (Watts and

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Zimmerman, 1978). In this case, it is important to understand in which way the information

presented in the financial statements is presented and based on which principles.

During its lifecycle, the company faces many events that have consequences concerning the

company’s assets, liabilities and equity. Because only the agents’ known these events, these

events concerning the principals are of importance, consequently the events need to be

registered and reported.

Stolowy and Lebas defined financial accounting as, “… a process of description of the various

events that take place in the life of a firm” (Stolowy and Lebas, 2002, page 12).

The processes performed by a firm in its lifetime can be of different value and importance to

the users of the financial statements. The shareholders will be interested in different type of

transactions than for example creditors. The shareholders would therefore expect different kind

of information to be present in the financial statements, than creditors.

The figure below shows the users of the financial statements, of which most have different

needs relating to the information to be present in the financial statements:

Figure 2 – Financial statements users (Stolowy and Lebas, 2002)

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Based on the figure, the amount of financial statements readers, with different information

needs, is large, making it for the management of the difficult to fulfill these needs in one set of

the financial statements. There are some users which require the information to be presented in

their own form, for example the governments tax department, but others don’t have their own

requirements in absence of further knowledge as implied by the agency theory.

It is therefore that most countries have implemented the accounting principles according to

which (listed) companies have to prepare their financial information, the Generally Accepted

Accounting Principles (GAAP).

§ 2.4 Accounting principles

Accounting principles are accounting rules set by the (local) regulators that are to be followed

by the companies registered in these countries. These rules are qualified as the General

Accepted Accounting Principles (GAAP) and since each country has its own rules, the GAAP

is often referred to with the country code. For United Kingdom it is UK GAAP and for the

Netherlands for example, Dutch GAAP. Each country has its own regulatory bodies, which are

responsible for the issuance of these principles and consists out of accountants.

In 1973 International Accounting Standards Committee (IASC) was founded which was

responsible for developing the International Accounting Standards (IAS). The foundation of

IASC was initiated by the agreement between the national accounting bodies of nine countries.

The purpose of the committee was to develop en promote the international accounting

standards, which were not obliged for use in that time, but could be voluntary adapted for use.

In the early 70’s the IASC board was compounded of public accountants only, with two

objectives:

1) to formulate and publish in the public interest accounting standards to be observed in the

presentation of financial statements and to promote their worldwide acceptance and

observance;

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2) and perform generally concerning the improvement and the harmonization of regulations,

of the accounting standards and concerning the procedures relating to the presentation of

financial statements.

During the last decades of the 20th century, concerning companies’ globalization became more

important and the country boarders did no longer limit companies. Because in addition the

government borders no longer limited the investors (shareholders), the need concerning

harmonization in the accounting standards became more important.

In the 90’s the work of IASC was used more widely and the work of IASC has become more

and more important, resulting in a restructure of the IASC in 2001. In that year the International

Accounting Standards Board (IASB) was founded which is responsible for the development of

International Financial Reporting Standards (IFRS). The objective of IASB:

To develop a single set of high quality, understandable, enforceable and globally accepted

financial reporting standards based upon clearly articulated principles. (www.iasb.org)

As of January 2001, almost 120 countries are using IFRS and more are expected to join.

Companies listed on the Euronext stock exchanges are obliged to file the financial statements in

accordance with IFRS.

In addition, it is important to note that although IASC in its beginning years was run by public

accountants, nowadays IASB decision-making process and involvement of others has changed

and is shown in the figure 3.

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Figure 3 – In which way IFRS’ are developed (www.iasb.org)

§ 2.5 Risk Reporting

Previous paragraphs have explained the need for information to the stakeholders, agents, of a

company. In the next paragraphs, the focus is on one particular group of these stakeholders: the

shareholders. Shareholders face the earlier signaled information asymmetry that not only relates

to financial information, but also to non-financial information. This information is mainly

related to the risks a company is facing, which increase in complexity as the environment in

which a company is getting more complex. Disclosure of this information in the annual

accounts, the financial statements, should reduce the shareholders’ uncertainties and doubts and

are therefore important to be disclosed (Marston and Shrives, 1991).

Increased complexity in the environment a company operates caused also that complexity of

business processes and associated risks have become more complex and more difficult to

manage. In the economic scientific literature, the most important and most widely used control

framework to manage risks and achieve objectives is the COSO ERM framework. Since the

first introduction of the model in 1992, it obtained its current form in 2004 (www.coso.org).

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The importance of risk management and reporting of it to the stakeholders has became more

obvious after the WorldCom and Enron scandals, where risks and disclosures were not

sufficiently presented in the financial statements and therefore have mislead the stakeholders

for years. In addition, the regulators have noticed that risk reporting is becoming more

important and in the United States, the Sarbanes-Oxley became effective in 2002 and in the

Netherlands the ‘Code Tabaksblat’ in 2003, both are required to be used by stock exchange

quoted companies.

The Sarbanes-Oxley act is actually a federal law of the United States of America, PUBLIC

LAW 107–204—JULY 30, 2002, and has as the objective to protect investors by improving the

accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for

other purposes. Section 404 of this law states that the management is required to have an

internal control framework in place and to contain an assessment of the effectiveness of the

internal control each fiscal year. It also requires that a public accountant shall report on the

operational effectiveness of the internal control framework. Especially the last part concerning

the United States of America is unique that the operational effectiveness has to be reported on

each year.

In addition, the Dutch ‘Tabaksblat Code’ is required to be applied by the Dutch stock exchange

quoted companies, but is less extensive than the content of the Sarbanes-Oxley act. The Dutch

variant is a best practice on in which way management should assess the risks and have an

internal control framework in place. Operational effectiveness is not obliged to be reported,

unlike the Sarbanes-Oxley act.

The before signaled instruments for risk management are meant either for internal use of the

management (COSO ERM framework) or report on the outcome of prior year (Sarbanes-

Oxley). The management though can decide to voluntary disclose the relevant risks in the

financial statements by presenting both quantitative and qualitative information. IFRS only

obliges the company to disclose this information on financial assets, which is explained in the

next chapters.

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§ 2.6 Summary

This chapter has explained why financial statements are a necessity in the environment in

which a listed company operates based on the agency theory. This theory concludes that

everyone is acting in its self-interest and since the shareholders of a company (principals) have

hired agents (management of a company) to operate it for them, the goals need to be aligned

and controlled. In order to be able to do that, the shareholders need information, based on

which they can made their investment decision. This information can be presented in several

forms, of which financial statements are one of them. Financial statements represent a summary

of activities of a company for the past period (usually one year) and the financial consequences

of these activities. In order to have the information in the financial statements aligned with the

information need of the user, the general accounting principles have been developed based, on

which the financial statements have to be prepared. IFRS is one of these principles and is since

2001 required to be used by European stock exchange listed entities, but has been adopted in

much more countries since. The need concerning information in the financial statements by the

shareholders is not only of retrospective financial nature, the shareholders’ in addition the

decisions should be based on information based on risks associated with their investments.

Although the management of the company has been involved in risk management since

decades, the reporting of it has not been a requirement for a long time. Furthermore, there is not

one method to present the risk exposures of a company. In their study, Cabedo and Tirado

(Cabedo and Tirado, 2004) have investigated the VaR model and the use of the VaR in risk

reporting. Based on their research, they have identified the possible risk exposures within a

company and they have presented a method in which way to quantify and report these risks to

the shareholders.

Based on the information presented in this chapter, the first sub question of the research, What

are financial statements and what purpose do they have for the shareholders? has been

sufficiently addressed. This chapter was also an introduction to IFRS, where the next chapter

will specifically discuss one of the standards of IFRS: IFRS 7. Based on which the literature

and empirical researches are performed.

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Chapter 3: IFRS 7

§ 3.1 Introduction

In the previous chapter an introduction and background was presented concerning IFRS and the

obligation for European stock exchange quoted companies to apply the IFRS. This chapter will

focus on one of the standards, related to risk reporting in the financial statements: IFRS 7. The

purpose of this chapter is to describe the standard and its requirements, assess the scientific

literature concerning this standard and by means of an empirical research investigate the impact

of this standard on the financial statements of stock exchange quoted European companies. The

literature review will focus on existing research performed concerning risk reporting and in

which way these researches were conducted, while the empirical research will focus on IFRS 7

risk reporting requirements concerning the years 2007, introduction year of IFRS 7, 2008 and

2009.

The main purpose of this chapter though, is to answer the second sub question of this thesis:

What is IFRS 7 and what is its purpose?

§ 3.2 Content of IFRS 7

Risk reporting need has been commented in the prior chapter, as has been the lack of

requirements on this subject concluded by Cabedo and Tirado. The International Financial

Reporting Standards have increased in risk reporting requirements since 2007, when IFRS 7

was introduced. It has to be noted though, that this standard only applies to financial

instruments of a company and not on a company as a whole, as for example Sarbanes-Oxley act

and Code Tabaksblat do.

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The definition of a financial statement is stated in IAS 32 par 11: A financial instrument is any

contract that gives rise to a financial asset of one entity and a financial liability or equity

instrument of another entity. Based on the definition it is important to note that a financial

instrument is any contract resulting in a financial asset concerning one party and a financial

liability or equity concerning the counterparty, examples of which are equities and derivatives.

Derivatives, one of the examples of financial instruments, have mostly been the cause of the

recent credit crunch. IAS 39 par 9 defines a derivative, as A derivative is a financial instrument

[..] with all three of the following characteristics:

a. its value changes in response to the change in a specified interest rate, financial instrument

price, commodity price, foreign exchange rate, index of prices or rates, credit rating or

credit index, or other variable, provided in the case of a non-financial variable that the

variable is not specific to a party to the contract (sometimes called the ‘underlying’);

b. it requires no initial net investment or an initial net investment that is smaller than would

be required for other types of contracts that would be expected to have a similar response

to changes in market factors; and

c. it is settled at a future date.

Based on this definition, a derivative financial instrument is a contract that has an underlying

benchmark/financial instrument on which the performance (value) of the derivative is based on.

A derivative can also have several underlying contracts on which the performance is based on,

for example a credit default swap speculating on a credit event of a number of mortgages in a

portfolio. These derivatives combined, can be put in a separate, well-known entity, which can

than issue bonds to gather capital. These newly issued bonds can then be risk rated based on a

well-known entities name, not realizing these bonds are part of the funding for a high-risk

portfolio of bad performing mortgages. Because the market did not realize what financial

instruments were on the balance sheet of a company, let alone realize the risk associated with it.

These kinds of constructions had caused the current credit crunch. .

In response to this, IASB had obliged all companies applying IFRS, to implement IFRS 7 as of

January 1, 2007, with the objective to enable the users of the financial statements to evaluate

the significance of financial instruments concerning the entity’s financial position and

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performance. In addition, the nature and the extent of risks arising from financial instruments to

which the entity is exposed during the period and at the end of the reporting period, and in

which way the entity manages those risks.

IFRS 7 requires disclosures at least related to the following risks: market risks, credit risk and

liquidity risk. Going back to the previous chapter, most of the financial risks identified by

Cabedo and Tirado are covered by IFRS 7 relating to financial instruments, it is only risks

related to processes of the company which are not covered by the standard, as IFRS still

remains to be a financial accounting standard.

The standard requires a company to categorize its financial statements on the balance sheet

(statement of financial positions) or in the notes into the following categories, (IFRS 7 par 8):

i) Financial assets measured at fair value through profit and loss

ii) Financial liabilities measured at fair value through profit and loss

iii) Financial assets measured at amortized cost

iv) Financial liabilities measured at amortized cost

v) Financial assets measured at fair value through other comprehensive income

This classification provides users of the financial statements insights in which way the

valuation of particular financial instruments is performed and whether these are valued based

on amortized cost or at fair value. An example of the categorization before is noted in the 2009

financial statements of ING Group on the balance sheet where the financial assets at fair value

through profit and loss and investments available-for-sale and held-to-maturity are recognized:

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Figure 4 – Financial instruments on the balance sheet

(ING Group Financial statements 2009)

The disclosures than provide information on which category is at fair value and which is at

amortized cost:

Figure 5 – Notes to the financial instruments

(ING Group 2009 financial statements)

The grouping of the financial statements continues further in the standard, as the financial

assets and liabilities measured at fair value have to be grouped as well, to provide the users

insights on in which way by the management this fair value has been determined. IFRS 7

paragraph 27A prescribes three levels of fair value measurement, which are similar to FAS 157

from US GAAP adopted two years earlier:

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Level 1:

quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2:

inputs other than quoted prices included within Level 1 that are observable for the asset or

liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)

Level 3:

Inputs concerning the asset or liability that are not based on observable market data

(unobservable inputs)

This disclosure level is only a requirement since 2009, and presents insights on the origin of the

valuation procedures performed by the management. Level 3 investments have to be disclosed

in more detail in which way the valuation is performed and based on which information.

Furthermore, the movements in level 3 have to be disclosed as well, giving the user insights on

the profit and loss and cash flow impact of these level 3 investments.

Figure 6 – Levels of financial instruments

(ING Group Financial statements 2009)

In addition, the standard requires a company to disclose the nature and the extent of risks

arising from financial instruments. These are not only required to be of quantitative nature, but

also of qualitative nature. Meaning that an entity has to disclose per risk category in wording

23

the exposures and in which way the risks arise and the company’s objectives and procedures to

mitigate these risks (IFRS 7 par 33). Quantitative disclosures should include the exposures in

figures per risk and relevance.

The definitions of risks according to IFRS 7 are part of appendix A of IFRS 7 and the standard

requires the following disclosures per risk category:

Credit Risk

Maximum exposure to credit risk, description of collaterals held and past due / impaired

financial instruments. In this case, an example would be a disclosure communicating that all the

financial instruments are held at one custodian with the risk that if the custodian defaults, all of

these instruments will be impaired. A possible mitigation of the risk would be spreading the

financial instruments among several custodians.

Figure 7 – Extract from credit risk past due / impaired disclosure

(ING Group Financial statements 2009)

24

Liquidity risk

Maturity analysis concerning non-derivative financial liabilities and derivative financial

liabilities and in which way the company manages the risks associated with these liabilities. A

company should disclose per maturity term the amounts that are due at that time, for example,

X is due in one month, Y is due in one year, and Z is due in three years. Furthermore, a

company has to disclose in which way it intends to fulfill these liabilities, for example showing

that it has sufficient timely cash flow to pay the liabilities in due time.

Figure 8 – Extract from liquidity risk disclosure

(ING Group Financial statements 2009)

25

Market risk

Per risk category a company need to disclose a sensitivity analysis showing in which way the

profit and loss and equity would have been affected by changes in the risk variable and the

methods and assumptions used in preparing the sensitivity analysis. The sensitivity is presented

based on ongoing risks, with a what if assumption: if one variable would change, what would

then be the impact on the profit and loss and equity. Paragraph 41 of IFRS 7 in addition allows

a value at risk model to be used instead of the sensitivity analysis per risk as explained before.

Figure 9 – Extract from market risk disclosure (ING Group Financial statements 2009)

26

§ 3.3 Summary

The guidance of IFRS 7 prescribes the disclosure requirements for financial instruments, of

which the definition is provided in IAS39. The disclosure requirements of this guideline are

meant to provide insights on the risks that relate to the financial instruments held by the

company. The guideline prescribes the specific disclosure requirements and defines the risks

that are associated with the instruments, but it also prescribes that the risks should be disclosed

‘through the eyes of the management’. By implementing the IFRS 7 disclosures, the users of

the financial statements will be able to read what kind of instruments are being held, which

exposures are present at the balance sheet date and what impact a change in the environment

could have on the value of the instruments held. Relating to the derivatives, of which the

exposure is not visible on the balance sheet, the disclosure could provide information how

much risks a company is accepted. In addition concerning other financial assets, like equities,

the IFRS 7 disclosures provide insights in which way the fair value has been determined by the

management and what kind of equities these are, which is being grouped in three levels

prescribed by IFRS 7. The purpose of IFRS 7 is to enable users to evaluate the significance of

financial instruments and the nature and extent of the risks arising from the financial

instruments to which the company is exposed.

Based on the knowledge of IFRS 7 risk disclosure requirements, discussed in this chapter, the

next chapter will focus on the existing literature and research performed on risk disclosures and

IFRS 7. The purpose of the next chapter is to review the existing literature and formulate

hypotheses based on the conclusions of the previously performed researches.

27

Chapter 4: Literature review

§ 4.1 Introduction

This paragraph discusses the research performed on the risk reporting and IFRS 7, in order to

understand the methods used by others and to investigate the results and conclusions of other

researchers. Although the IFRS 7 standard is relatively new, three large accounting firms have

already performed research on the impact of the standard on the financial statements and in

which way the companies (banks) have complied with the standard. J. Bischof in addition has

been performed this with a larger sample size. These researches will be commented further in

this paragraph, which will start with the research performed on risk reporting in the

Netherlands and the effect of it on the share price development of a company performed by

Groenland et al. Although the IFRS 7 standard is indeed new, risk reporting and research on

risk reporting is not new, and has been researched on in the past, therefore also this research is

taken into account in this chapter. The research question concerning this chapter is what impact

has risk reporting had on the financial statements?

§ 4.2 Literature review

Cabedo & Tirado

Cabedo and Tirado acknowledge the absence of regulation on risk reporting and indicate in

their paper that the information is not wholly adequate for decision-making purposes (Cabedo

and Tirado, 2004). In their paper, the Cabedo and Tirado define risk as “the possible loss in

company wealth arising from the interaction of [internal and external] factors.” Based on that

definition, different risks are identified: financial and non-financial. Non-financial risks are

business risk and strategic risk; financial risks are market risk, credit risk, operational risk and

28

liquidity risk. The research prescribes quantification methods per type of risk based on a value

at risk model (VaR) with the objective to identify the risks a firm is facing and propose a model

for each risk on how to disclose each.

The research of Cabedo & Tirado is a literature study performed and development of a

quantification model in order to be able to define and measure the risks that firms are facing

after which an empirical study is performed on the financial statements of listed entities for the

period 1991-2001.

- Business risk,

The risk a company will lose its ability to create competitive advantages and added value for

its shareholders, with an influence on the possible future loss of the company wealth.

Measuring efficiency of a company would enable to capture this risk exposure, as Cabedo

and Tirado state that the most competitive companies are the most efficient ones. The

calculation can then be performed in four stages: identification of variables (efficiency),

estimation of sensitivity, likelihood of occurrence and the final stage combines the outcomes

of the third and fourth one.

- Strategic risk

The influence of economic changes in the environment of the company focusing on the

company’s performances. In the valuation of the risk, specific economic environment

factors have to be identified for each company that are of influence on the performance of

the company that can then be calculated as a factor of the wealth of a company.

- Market Risks

Which are risks resulting from changes in the economical environment in which a company

operates. These changes include changes in the exchange rates, interest rates, price changes

in financial assets other than fixed income and commodity price changes. While other risks

can have an indirect impact on (future) results and cash in/out flows, these market risks

impact both the cash in and out flow of the company as well as the net profit and are

therefore important to be captured and reported to the shareholders of the company (agents),

as stated by Cabedo and Tirado. In quantifying the market risks, Cabedo and Tirado make

29

use of the VaR developed by JP Morgan Riskmetrics. This model was developed to calculate

the maximum loss on a portfolio, influenced by a combination of risks, resulting in

capturing only the maximum loss and not the probability of risk occurrence, which has the

advantage that a maximum exposure on the portfolio in cash can be calculated. In light of

the model, Cabedo and Tirado follow the Basel Committee on Banking Supervision to assess

the appropriateness of risks to be measured. Aggregate market risk or per defined category,

which conclude that quantification per category is the most appropriate one. As aggregated

market risk, would require an assumption that the categories within the market risk correlate

with each other (which cannot be supported) and furthermore the disaggregated results per

category would be lost in the outcome, which can be useful for the different type of users.

- Credit Risk

This is the risk that a decrease in the real value of a company’s portfolio occurs caused by a

default or another credit event (insolvency) with the participants in the portfolio. An

example is a doubtful debtor’s provision, where the credit risk has been quantified and

captured in the provision for the debtors. This provision though, only captures the expected

loss3, not the unexpected loss4 and is consequently not sufficient to capture the credit risk of

the company as a whole. In their research, Cabedo and Tirado therefore state that the

financial statements with only this allowance are not covering the credit risk of the company

and therefore further risk disclosures are necessary to cover the risk exposure. For

quantification purposes, the writers have acknowledge the existence of models to capture

credit risk, but the use of these models for all types of companies is not practical as the

models are designed for banks. Cabedo and Tirado have therefore adjusted the model for

use in all sorts of companies and have used the adjusted model in their paper to capture the

credit risk of a company. The first part of the quantification is to assess the clients which

receivable balances have not been accounted for as doubtful debtors and estimate, based on

a statistical probability model, the possible loss due to credit events in that population.

Based on the VaR model, the worst possible scenario has to be calculated with the impact on

the total population of the client portfolio, while the final stage should be to exclude the 3 IAS39 requires objective evidence of a possible loss caused by an event, which would cause the value of assets to

decrease, i.e. under IFRS 7 this is not a provision. 4 The unexpected loss is not allowed to be provided for as it is not ‘more likely than not’ that it occurs.

30

allowance for doubtful debtors from the VaR calculation, as has already been presented in

the financial statements.

- Operational Risk, the risk occurs from errors or failures in established procedures with a

company, is quantified by dividing the activities into business areas, defining an activity

indicator per business area and the possible loss factor per business area, which is the

impact of the loss caused by a failure in a business areas activity. The sum of the loss factor

times the activity indicator is the potential loss within a company caused by operational

risk.

- Liquidity Risk

Is the risk of potential losses due to a mismatch between the current liabilities and current

assets5, making losses occur because a company is not able to fulfill its short term liabilities

with the short term assets it has. In order to quantify the liquidity risk, Cabedo and Tirado

suggest that companies prepare a future cash flow statement for the company, based on the

sections provided by IAS 7. As the companies are already required to produce a cash flow

statement for the period for which they report (retrospective), including the cash paid and

received, it should be possible to also produce such statement for a future period that will

than expose the possible liquidity risks.

In their research paper, Cabedo and Tirado have concluded that although the need for risk

reporting seems to be acknowledged by both the literature and the accounting

organizations, a framework for reporting has not been established. In their paper, the writers

have presented the VaR models on in which way to quantify the risks and report these to

the users of the financial statements. Their research is based on existing literature, and

concerning risk reporting is relying on the VaR model. It is questionable though, whether

the VaR is the best suitable method, as it reports the maximum loss associated with the risk,

which is useful for risk adverse investors. The risks identified by Cabedo and Tirado are

mostly captured in IFRS 7. This prescribes the way of reporting and allows the use of VaR

models, it is questionable though whether maximum loss information, the VaR model, is

5 Current assets and liabilities are assets and liabilities that are due in one year or sooner, which is the definition from IFRS.

31

more useful than for example a what if assessment: sensitivity analysis of the impact of

changes in the variables to the profit and loss statement. In the next chapter, the IFRS 7

requirements will be explained in more detail, and the financial statements of the listed

entities will be empirically researched in order to assess in which way the IFRS 7

requirements are implemented in the financial statements over the years.

Groenland, J., Daals, R., Eije H. In the research of Groenland (Groenland et al. 2006), Dutch companies were investigated for

risk reporting and the effect of risk reporting on the development of the share price. The risk

reporting was based on the Dutch code Tabaksblat that covers more than, only the risk

reporting on financial instruments as IFRS 7 requires. The research performed covered 125

companies listed on the Euronext stock exchanges, based on 2004 financial statements.

The four research questions were:

Does the annual report contain references to the Corporate Governance code?

Are the risks disclosed in the annual report?

Does the company mention the risk management system and internal control framework in its annual report?

Does the company explain the risk management system and internal control framework in its annual report?

The research on the risk reporting was performed by analyzing the amount of pages dedicated

to risk reporting and the risk categories disclosed in the annual report. The categorization of the

risks is based on Deloitte Enterprise Risk Services this cover the external environment, the

competitors’ environment and the internal environment. The risk disclosure categories used by

Groenland et al. in the research have little similarity with the IFRS 7 disclosure requirements

but it is interesting to notice in which way the companies are dealing with risk reporting in the

financial statements when there now fixed requirements for disclosures. It is furthermore

noticeable that the research signaled an average number of pages used to disclose the risks are

three and a half, which seems not much, considering an average of 85 pages (Deloitte, 2006) of

an annual report. The research furthermore concludes that 76% of the companies selected,

32

reports on risks in the annual report and 118 companies report on the Corporate Governance. In

addition, it is noticeable that in the research the amount of diversity of risk categories signaled

by the companies is large, making comparability between the companies difficult. In addition,

this by Hossfeld is communicated in his research (Hossfeld, 2004).

In addition, the effects of risk reporting on the share price of the company are covered by the

research of Groenland (Groenland et al. 2006). They used the assumption that based on the

reported risks a negative trend should be visible in the development of the share price and a

positive trend when risk mitigation measures are disclosed, furthermore a correlation is

investigated between the amount of pages dedicated on risk reporting and the share price

development of the company. By the empirical research, none of these hypotheses were

supported; only one positive correlation was noticeable between communicating the risk

management system and the internal control framework in the annual report and the share price

development. The researchers disclose because of the amount of analyses was performed in

order to support the theory, that this fact could have been a random correlation.

The research of Groenland et al has learned that when a free system concerning for risk

disclosures exists, the risks disclosures in the annual accounts are very divers, supporting

Hossfeld worry relating to the comparability of the financial statements (Hossfeld, 2004). To

measure whether or not a risk was disclosed, concerning researching the risk disclosures

Groenland has used a checklist. The amount of pages dedicated to the risks, suggested the

quality of the disclosures. In the remaining of this research by using a checklist concerning the

risk disclosures, the approach of Groenland will be used. In order to test the quality (and

compliance with the standard) the checklist will contain more items per risk category. To

investigate whether the increase in pages in the annual accounts are caused by the use of IFRS

7 in addition the amount of pages dedicated to the risk disclosure will be included. .

33

Bischof, J.

In 2009, the research of Bischof concerning the IFRS 7 adoption had been published,

commenting the standard and the application of it in the financial statements of banks in

Europe. In his research, Bischof has formulated the next hypotheses (Bischof 2009):

During the year of IFRS 7 adoption, the overall level of disclosure by European banks has significantly increased.

The increase in the disclosure of information about exposure to credit risk is significantly higher than the increase in the disclosure of information about exposures to liquidity risk and market risk.

During the year of IFRS 7 adoption, the proportion of European banks presenting financial instruments by measurement categories has significantly increased.

The effect of IFRS 7 adoption on the disclosure level of European banks varies according to differences in the activity of national supervisory authorities.

The research was based on the risk reporting requirements in IFRS 7 and was conducted using

the following variables:

- Number of pages of the financial statements

- Number of pages on risk reporting

- Portion of the information on risk reporting relating to credit risk, liquidity risk and market risk compared to total pages discussing the risks

- Number of pages devoted to credit risk, liquidity risk and market risk

The research is based on a sample of 171 banks in 28 European countries applying IFRS in the

years 2006 and 2007. A significant increase in the amount of pages is found after the adoption

of IFRS 7 from 70 pages before to 75 pages after the adoption. In addition the amount of pages

reporting on risks increased from 14 to 20, where 40% was reported on credit risk (30% before

IFRS 7), 17% on liquidity risk (20% before IFRS 7) and 30% on market risk (41% before IFRS

7). Fifty percent of the risk disclosure consisted out of quantitative disclosures. Based on his

research, the author concludes that relating to the amount of pages in the financial statements a

34

significant increase have been found in risk reporting at banks due to the implementation of

IFRS 7.

This research in addition focuses on the quality of the disclosures, instead of only focusing on

the number of pages to assess the quality of the disclosures in this research will included what

is disclosed per risk category. Concerning the credit risk, the (internal) credit ratings of the

customers are to be disclosed according to IFRS 7 and Bischof noticed that 73% of the sample

is actually disclosing the ratings; this was only 28% before IFRS 7 became a requirement.

These credit ratings and the financial assets past due but not impaired, which are now disclosed

in 64% of the cases instead of prior 8%, are an important indicator concerning the investors to

assess the risk of the portfolio (Bischof 2009).

The market risk, as commented in the previous paragraph, can be disclosed either as a

sensitivity analysis or as a Value at Risk model, expressing the maximum loss. Bischof’s

research shows that 30% of the sampled banks use sensitivity analysis concerning the market

risk, 24% the VaR, 37% use both and 8.5% use a different measure, all banks disclose the

market risk. In addition, the percentage of banks disclosing the liquidity risk analysis, maturity

of the liabilities, has increased from 85% to 93%.

The author of the research concludes on his research that the implementation IFRS 7 did have a

significant impact on the financial statements in both the amount of pages and the quality of

disclosure. The focus of the disclosures though at banks, shifted from market risk, to credit risk

but overall the impact of the implementation of the new standard has had a significant impact

on the financial statements of banks.

To measure both the quantitative and the qualitative impact of IFRS 7 in his research Bischof

provides a model; his research is useful concerning future researches on IFRS 7 and will form a

basis concerning this research. In addition, the author acknowledges the variables, and

information, used concerning the research. These are useful concerning the users of the

financial statements based on prior researches conducted by Gassen and Schwedler (Gassen

and Schwedler 2008) and Vietze (Vietze 1997).

35

KPMG, Ernst & Young, PricewaterhouseCoopers

To assess the effects of the reporting standards and changing environment on the financial

statements in that industry, the three largest audit firms perform annual surveys in the financial

sector. KPMG (KPMG 2009), Ernst & Young (Ernst & Young 2008) and

PricewaterhouseCoopers (PWC 2008) have performed the surveys on the financial statements

of European Banks and have assessed, among other, the impact of the IFRS 7 disclosures and

the presentation of these requirements in the financial statements of the banks. KPMG had

sampled 16 banks in their research with financial statements’ reporting period 2008, PWC

based its research on 21 banks for the year 2007 and Ernst & Young selected 24 banks for the

same reporting period as PWC.

All three firms divided their report on the risk reporting concerning IFRS 7 into chapters

relating to the three specific risks: Credit Risk, Liquidity Risk and Market Risk. Ernst & Young

does not conclude on the reporting quality of the disclosures, and does not signal any

significant discrepancies with the expected disclosures. In addition, KPMG describes the

disclosures of their survey and notice that all banks in the population comply with the standard

and note that there is significant variability in respect of the spread of individual vs. collective

impairment (KPMG 2009, page 17). Both KPMG and Ernst & Young concerning the survey

used IFRS 7 disclosure requirements concerning credit risk. PricewaterhouseCoopers (PWC)

has the credit risk disclosure requirements divided in four categories: total exposure and

performing assets; past due/impaired; collateral; renegotiated assets with the purpose not only

to test the compliance of the banks to the requirements, but also to comments on the quality of

the disclosures and its requirements. PWC comments that the criteria on determining the

impairment of the assets do not provide the readers of sufficient understanding of the criteria.

Furthermore, PWC is worried about the current disclosure requirement concerning the

collateral associated with the past due and impaired assets. The current requirement in IFRS 7

is only to disclose the fair value, where PWC expect more use in disclosing the extent of over-

or under-collateralization of the assets (PWC 2008). This though seem more relevant

concerning banks than concerning other industries, as it is typically in the banking industries,

36

where loans can be past due and/or impaired where over- or under-collateralization would be

meaningful to the users.

Both KPMG and Ernst & Young show that the liquidity risk disclosure is widely adopted by

the banks and since IFRS 7 is not industry specific, requiring only the liabilities being

disclosed, most banks voluntarily choose to disclose more than required, in addition disclosing

the assets maturity table. In addition, this was a finding in the research of Bischof (Bischof

2009). PWC issues more worries about the liquidity risk disclosure requirement, it states that

the current presentation of the tables is not user friendly and is missing information to have

added value to the reader. The tables only disclose the positions at balance sheet date and do

not state whether the amounts are discounted or not, netted or not (derivatives), whether off

balance sheet amounts were included or not and if the guarantees were taken into account.

Furthermore, PWC states that a sensitivity analysis in the liquidity risk disclosure will add

value to the readers (PWC 2008). As the reader is currently missing essential information

concerning the liquidity risk, the criticism of PWC on the liquidity risk requirement is

understandable. . The suggestions of PWC would be meaningful for not only banks, but also for

most companies as off balance assets and calculation method of the presented amounts could

change the meaning of the table and interpretation of it. Although the purpose of this thesis is

not to question the IFRS 7 requirements, the comments of the accounting firms does provide

meaningful information on the understanding of the standard and the purpose of it for the users

of the financial statements.

The market risk disclosure was mostly disclosed using at least VaR, which was concluded by

all three firms. Using this value at risk model, there was a wide variety in both the assumptions

and the variables in the model between the banks, making the comparability between banks

very difficult (KPMG 2009). Both KPMG and PWC indicate that aside the use of VaR,

sensitivity analyses were used for the non-trading part of the portfolio, where PWC comments

that the use of this sensitivity analysis is not adding much value as this analysis is difficult to

understand and to find for the users of the financial statements (PWC 2008).

37

As IFRS 7 does not require a specific place in the financial statements concerning risks to be

disclosed, PWC in their report signaled that the disclosures are difficult to be found in the

financial statements. In addition, are often even communicated twice in both the MD&A6 and

in the financial statements, creating a bigger annual financial statement than necessary.

The reports of the three audit firms are issued based on the surveys among banks concerning

the research on the IFRS 7 disclosures. The findings of the audit firms are that all banks comply

with the requirements, but especially the market risk disclosure has a large variety of

presentation, in order to base their decision on this information creating concerning the users of

the financial statements difficulties to understand and to compare the financial statements with

each other. In addition it has become more understandable that the IFRS 7 disclosures are

difficult to find and to capture, as the place to be reported is not prescribed in IFRS 7.

Objective and research questions

In the previous paragraphs several prior researches have been discussed. Based on these

researches and developed models, an empirical research is performed. In order to perform an

empirical question, first the objectives and research questions are formulated, concluding on the

prior researches and literature.

The objective of the empirical research is to investigate whether the impact of IFRS 7 on the

financial statements for the years 2007, 2008 and 2009 is still of significant impact. The first

two research questions focus on the total amount of pages dedicated to IFRS 7 disclosures:

H1A:

Compared to the annual financial statements 2007 in the annual financial statements 2008 the

IFRS 7 risk disclosures are significantly more

6 MD&A stands for Management Discussion and Analysis, a section of a company's annual report in which management discusses numerous aspects of the company, both past and present.

38

H1B:

Compared to annual financial statements 2008 in the annual financial statements 2009 the IFRS

risk disclosures are significantly more

These research questions will focus on IFRS 7 risk disclosures only, and the amount of pages

dedicated to these disclosures, will be counted concerning the years 2007, 2008 and 2009. The

financial statements will firstly be reviewed for identification of the risk disclosures, and if a

reference is made to the annual report in the financial statements, the referred to paragraphs

will be taken into account for the research. Based on the average amount of pages dedicated to

the risks, the difference between the years in the average amount of pages will be tested for

significance with the T-Test, as explained in the previous paragraph.

The next objective is to investigate the disclosure quality and quantity of the three risk

categories required to be disclosed by IFRS 7. Based on the research findings of Bischof

(Bischof 2009) and recent credit crunch, the hypotheses are formulated as

H2A:

Compared to the annual financial statement 2007 in the annual financial statement 2009 the

credit-risk disclosures are significantly more.

H2B:

Compared to the annual financial statement 2007 in the annual financial statement 2009 the

credit-risk disclosures are significantly better.

H3A:

Compared to the annual financial statement 2007 in the annual financial statement 2009 the

Market risk disclosures are significantly less

39

H3B:

Compared to the annual financial statement 2007 in the annual financial statement 2009 the

Market risk disclosures are significantly less Market risk disclosures are significantly better

H4A:

Compared to the annual financial statement 2007 in the annual financial statement 2009 the

Liquidity risk disclosures are not significantly more

H4B

Compared to the annual financial statement 2007 in the annual financial statement 2009 the

Liquidity risk disclosures are significantly better

The research of Bischof showed a shift from the disclosure of the market risk to the credit risk,

due to the credit crisis this shift is expected to be present, which was the result of defaults of the

counterparties. No changes are expected concerning the liquidity risk.

Furthermore both PWC (PWC 2008) and Bischof (Bischof 2009) indicate that the IFRS 7

disclosures are often part of the annual report, meaning most of the risks are disclosed twice in

the annual report, once in the MD&A and once in the financial statements. The hypothesis

based on these researches if formulated:

H5A:

A correlation exists in the increase in the amount of pages dedicated to risk disclosures and the

increase in the amount of pages of the annual report.

H5B:

A correlation exists between the amount of pages of the annual accounts and the amount of

pages of the financial statements.

40

§ 4.3 Summary

In order to answer to the third research question: what impact has risk reporting had on the

financial statements? In this chapter six researches have been described, and concluded on in

relating to risk disclosure research.

Calbedo & Tirado’s research on risk disclosures, which has been performed before the

mandatory use of IFRS 7 has been implemented, acknowledges the need concerning risk

reporting. Their study identifies two types of risks: financial and non-financial, of which the

financial risks are market risk, credit risk, operational risk and liquidity risk. The researchers

suggest concerning presenting those risks and providing the possible maximum loss on

occurrence to use the value-at-risk model. The current IFRS 7 standard, acknowledges most of

the financial risks identified by Calbedo & Tirado, but provides the option concerning

management in which way to present the exposures: value-at-risk and/or sensitivity analysis are

both allowed.

The disclosure of risk reporting in general (not only financial instruments), has been

investigated by Groenland et al in 2006 on the Dutch companies. Their findings are that little

consistency exists in the risk disclosures between companies and comparing these disclosures

with each other is difficult. The researches have also developed a method on in which way to

measure the quality of risk disclosures: checklist and amount of pages dedicated to a certain

risk. Their method to measure the quality by the amount of pages used for a certain risk is

argued by Bischof.

Bischof stated that the quality of a risk disclosure, IFRS 7 in particular, is to be measured by

evaluation whether the criteria of a certain risk are covered with the disclosure. The amount of

pages is not relevant for the quality. Based on his research, Bischof has developed a model to

be used to measure the quality of risk disclosures, which is also used in this research. His

research focused on the quality of risk disclosures before and after IFRS 7 implementation, and

the findings were that there was a significant increase in the quality of risk disclosures by

41

banks. Bischof’s model for quality measurement of the disclosures will be used for the

empirical research of this thesis.

In addition, the three accounting firms have performed a research on the quality of risk

disclosures in the financial statements of banks. All three conclude that the banks are compliant

with the standard and therefore do disclose the minimum required by IFRS 7. Although the

three researches conclude on compliance with IFRS, PWC expresses its worries on the

comparability of especially the market risk disclosures between companies. IFRS 7 has

provided the most ‘playing ground’ in that risk disclosure, allowing VaR and Sensitivity

analysis. PWC signals that this risk disclosure between companies is difficult to compare.

Furthermore, PWC signals that the place where the IFRS 7 in the financial statements is to be

disclosed is not specific enough, resulting in an extensive search concerning the disclosure in

the financial statements. These three researches have provided the guidance on the compliance

of IFRS 7 and the pitfalls when researching the IFRS 7 risk disclosures, which are of use for

further research.

The literature review in this chapter, covering six researches on the risk disclosure topic, have

provided the methods on in which way to measure the quantity of risk disclosure (Groenland,

Bischof), the quality (Bischof, PWC) and the compliance (PWC, KPMG, Ernst & Young). The

conclusion is that after the implementation, the risk disclosures are significantly better, and as

of today most banks comply with these requirements.

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Chapter 5: Empirical research

§ 5.1 Introduction

Based on the literature review from the previous paragraphs and research questions formulated

based on the research, an empirical research is performed to investigate the impact of IFRS 7

on the financial statements of European listed companies. The literature review showed that

IFRS 7 has had a significant impact on the financial statements after its introduction in 2007

(Bischof 2009), the question remains though on in which way the disclosure quality and

quantity has evolved, or not, during the period 2007-2009. Furthermore, criticism has been

evoked that the financial statements are growing in quantity and the users might get lost in the

large amount of pages and places of the disclosures (PWC 2008, Deloitte 2006).

The research question concerning this chapter is what influences the IFRS 7 disclosures have

had on the financial statements after its implementation?

§ 5.2 Methodology

The empirical research performed is based on the review of the financial statements of listed

companies. These financial statements are published by the companies and audited by external

accountants. The content of the financial statements will be reviewed and data from the

financial statements will be gathered and analyzed. This content analysis is also the method

used by researches signaled in the thesis, acknowledging its limitations. The main limitation of

the research method, content analysis, is the possible subjectivity involved in analyzing the

data; consequently, the need concerning objective measurements is critical. Concerning the

quantitative part of the research, the amount of pages dedicated to a specific disclosure will be

counted. The limitation of this approach is that the amount of words could differ due to

different letter types and segregation of the disclosures in the financial statements. The

43

qualitative part of the research focuses on the depth of the disclosure, for which the grouping is

of importance in order to obtain consistent and reliable data analysis.

The reason for choosing the content analysis as research method is the availability of the

financial statements and comparability with prior researches, which were also content analyses.

The empirical research consists out of two parts: quantitative and qualitative. The quantitative

part focuses on the amount of pages dedicated to the disclosures and the qualitative part will

focus on the quality of the disclosure.

The quantitative part of the research is focusing on the size of the financial statements. As

Deloitte (Deloitte 2006) had investigated a continuing growth in the financial statements and

Bischof (Bischof 2009) in addition signaled a growth in the size of the financial statements, the

research will investigate whether the financial statements are still increasing in size by

registering the amount of pages the financial statements consist of in 2007, 2008 and 2009.

Furthermore, PWC (PWC 2009) implies that risk disclosures are being signaled twice in the

annual report, once in the financial statements and once in the MD&A part of the annual report.

It is therefore that also the amount of pages of the annual report will be investigated for the

years signaled.

In order to verify the statistical significance of the quantitative information, the increase and/or

decrease in the amount of pages during the years, the means of the amount of pages will be

compared between the years on 95% confidence interval using the T-Test:

The last part of the quantitative disclosure research will be performed on the amount of pages

dedicated to specific risk disclosures of IFRS 7: Credit risk, Liquidity risk and Market risk. The

purpose of this research is to identify whether or not the disclosures per risk have increased in

the amount of pages.

44

For the measurement of the qualitative disclosures, the model developed by Bischof (Bischof

2009) is used. In this model, Bischof identifies per risk category of IFRS 7 the disclosures that

at are to be present in order to provide the user of the financial statements of sufficient

information. These categories per risk disclosure are used as dummy variables (present or not

present) and are concerning statistical significance tested for by using the T-Test. The

categories per risk used as dummy variables are present in table 1.

Table 1 – Risk variables used

The reason concerning not using the IFRS 7 guidance on the risk disclosures in this research is

that IFRS 7 requires disclosures to be present in both qualitative and quantitative form. The

standard does not explicitly prescribe in which way these risks need to be disclosed. The only

measurement, using the IFRS 7 guidance, would be only possible to verify whether a disclosure

is present or not. Since Bischof has presented in his research (Bischof 2009) the measurements

for the quality of the risk disclosure which is objectively measurable and can be researched

with dummy variables, his model is used for the empirical research.

The verification of the model of Bischof is performed based on the IFRS 7 checklist developed

by PWC (PWC 2010), in which the risks disclosure measurements of Bischof are verified

concerning the existence in the guidance.

45

§ 5.3 Approach

Based on the literature review, formulated research questions, and the model presented in the

previous paragraph an empirical research is performed to investigate the impact of IFRS 7 on

the financial statements of European listed companies. The literature review showed that

IFRS 7 has had a significant impact on the financial statements after its introduction in 2007;

the empirical research is conducted in order to investigate the effect after the introduction

period.

Selected population

The population selected is partially based on the researches of KPMG (KPMG 2009), PWC

(PWC 2008), Ernst & Young (Ernst & Young 2008) and Bischof (Bischof 2009). As Bischof

indicates in his research, banks are the most affected types of companies by IFRS 7, as 90% of

their assets are financial instruments (Bischof 2009). Since most researches have been

performed in the past on banks, certainly not wanted to exclude this group in the research, but

like to extend to other financial industry companies. Consequently, the selected population

concerning this research contains Euronext stock exchange listed financial companies, which

by the Euronext have been granted the ‘Large Cap’ category. The total population is presented

in Appendix B. The total population contains 21 companies of which 38% is an Insurance

company, 57% is a Bank and 5% is an Investment Company. Concerning these 21 companies,

annual reports for the years 2007, 2008 and 2009 will be investigated, totaling to 63 annual

reports as being the total population concerning this research. During the first round of the

research, it was noted that 2 companies did not report under IFRS and where therefore excluded

from further research. The total amount of annual reports investigated in further research

decreased to 57.

46

Chapter 6: Results

§ 6.1 Introduction

The research was conducted by the investigation of 63 annual reports (including financial

statements) divided over three years. The annual accounts were obtained from the websites of

the individual companies, as listed companies have the obligation to make the annual these

public available. During the review of the annual reports and financial statements it was noted

that the risk disclosures required for IFRS 7 were not presented twice, as suggested during the

literature review, but rather cross referenced in the financial statements to the specific

paragraphs of the annual report. This though agrees with PWC’s observation (PWC 2009) were

it noted that the search concerning these disclosures is not easy and clear. In addition, is noted

that in all cases, the companies were compliant with IFRS 7 requirements on risk disclosures

and most of the companies have disclosed the impact of the credit crisis in a separate,

voluntary, note in the financial statements or in the annual report. When the financial

statements were presented separately from the annual report, the total amount of pages of the

annual report is summed with the total amount of pages of the financial statements. If both the

consolidated and the statutory financial statements are presented in the annual report,

concerning the total amount of pages for the financial statements only the amount of pages of

the consolidated financial statements are taken into account.

Concerning the observation of the risk disclosures required by IFRS 7, the checklist of PWC

(PWC 2010) has been used and only the required and clearly marked risks were taken into

account. Although this observation can be judgmental, the consistency in the use of the method

concerning the three years will provide reliable information on the changes in the disclosures,

being the subject of the research.

During the research, two companies were noted which have not reported under IFRS, these

companies have been excluded for further research, as the focus of the research lies on the

47

IFRS 7 disclosures. The total population of companies for further research is therefore 19 and

the total population of the financial statements decreased from 63 to 57 because of the

exclusion of these companies. The findings per company, per year, are presented in

Appendix II.

§ 6.2 Results

The quantitative research shows that the average pages of the annual report has increased in

three years with 10.4%, while the average pages of the financial statements have decreased

with 3.1%. This decrease is not related to IFRS 7 risk disclosures as these have increased with

4.9 pages, to the financial statements decrease of 4.4 pages.

Table 5 – Amount of pages in annual reports

Further analysis of the risk disclosures show an increase in credit risk disclosures caused due to

the credit crisis in 2007, first being disclosed in the 2008 financial statements. In some financial

statements have decided to disclose the impact of the credit crisis in the same notes, combined

with their operational risk. The allocation of the risk disclosures between the three IFRS 7

defined risks, and some other specific risks is shown in Table 6. Liquidity risk needs the least

amount of pages to be disclosed, as research shows, while in 2009 other risks (mostly

operational risks) are considered just as important as credit risks. In addition, this has mostly to

do with the credit crisis.

48

Table 6 – Risk disclosures

Based on the collected data, it is important to understand whether these differences in

disclosures and the size of the annual accounts are statistically significant, for which the

research questions and method defined in the previous paragraphs are used to investigate.

The first part of the first research question is:

H1A:

Compared to the annual financial statements 2007 in the annual financial statements 2008 the

IFRS 7 risk disclosures are significantly more

In order to investigate the impact, hypotheses H0 and H1 are statistically tested:

H0:

The amount of pages dedicated to IFRS 7 risk disclosures is in 2008 compared to 2007, are the

same.

H1:

The amount of pages dedicated to IFRS 7 risk disclosures is in 2008 compared to 2007, are not

the same.

The impact of IFRS 7 for this question is measured by comparing the amount of pages

(quantitative) dedicated to risk disclosures in the financial statements of the companies in 2007

compared to 2008 and measure the significance of the difference in the means based on the

95% confidence interval percentage using the T-Test as shown in Table 7.

49

Table 7 – T-Test results

Based on the results, the H0 hypothesis is not rejected and consequently the increase in the

average page numbers of the risk disclosures between 2007 and 2008 is not significant.

The second part of the first research question is:

H1B:

Compared to annual financial statements 2008 in the annual financial statements 2009 the IFRS

risk disclosures are significantly more

In order to investigate the impact, hypotheses H0 and H1 are statistically tested:

H0:

The amount of pages dedicated to IFRS 7 risk disclosures is in 2009 compared to 2008, are the

same

H1:

The amount of pages dedicated to IFRS 7 risk disclosures is in 2009 compared to 2008, not the

same

50

In addition, concerning this question the amount of pages (quantitative) dedicated to risk

disclosures in the financial statements of the companies was counted and the significance was

tested by using the T-Test of which the results are presented in Table 8.

Table 8 – T-Test results

Based on the results, the H0 hypothesis is not rejected and consequently the increase in the

average page numbers of the risk disclosures between 2008 and 2009 is not significant.

The first two questions were to investigate the quantitative significance of the risk disclosures

in general required by IFRS 7 on the financial statements. Although an increase in the average

amount of pages can be observed, the increase is not statistically significant. In addition, the

increase between 2007 and 2009 is not significant, as presented in Table 9.

Table 9 – T-Test results

51

Based on the results of the research, during the period 2007-2009 the risk disclosures, as

required by IFRS 7, did not result in a significantly higher amount of pages in the financial

statements of the selected companies. During the research though, it was noticeable that some

companies have chosen to refer in the notes of the financial statements to the annual report.

These pages, although outside the financial statements, but within the scope of the financial

statements, were counted for in the research. Nevertheless, it is interesting to investigate

whether the annual report has grown in a significant way.

H0:

The annual report of 2007 does not contain more pages than the annual report of 2009

H1:

The annual report of 2007 does contain more pages than the annual report of 2009

Table 10 – T-Test results

Although the average amount of pages increased from 285 to 315 in two years, the increase is

not statistically significant. One of the causes could be the high standard deviation within the

population, as the range in the amount of pages between the annual reports is high.

52

Figure 8 –Annual report pages range

No significant, quantitative, differences between 2007 and 2009 are noted in the financial

statements related to IFRS 7, of which the total results are presented in Appendix III.

The next research questions relate to the specific risks of the IFRS 7 disclosure and the change

in the disclosures (if any) through the years.

Concerning the quantitative and the qualitative research of the credit risk disclosures, two

research questions have been defined:

H2A

Compared to the annual financial statement 2007 in the annual financial statement 2009 the

credit-risk disclosures are significantly more.

H2B

Compared to the annual financial statement 2007 in the annual financial statement 2009 the

credit-risk disclosures are significantly better.

53

In order to verify the statistical significance of the first part of the second research question, the

following hypotheses have been defined:

H0:

No significant difference exists in the average amount of pages dedicated to credit risk in 2009

compared to 2007.

H1:

A significant difference exists in the average amount of pages dedicated to credit risk in 2009

compared to 2007.

The T-Test outcome concerning these hypotheses is:

Table 11 – T-Test results

The increase in the amount of pages, related to credit risk, has been 2 pages (one third), but is

not statistically significant concerning the total population; consequently, the H0 hypothesis is

not to be rejected.

The defined hypotheses concerning research question H2B are:

H0:

No increase exists in credit risk disclosures relating to credit ratings of the assets and past

due / impaired assets in 2009 compared to 2007

54

H1:

An increase exists in credit risk disclosures relating to credit ratings of the assets and past

due / impaired assets in 2009 compared to 2007

The research is performed by investigation if in the financial statements, the credit ratings and

past due / impaired assets are disclosed and the results are compared based on the 95%

confidence interval percentage using the T-Test:

Table 12 –T-Test results

The results show that the credit rating disclosures have not increased in 2009 compared to

2007. The same amount of companies (12) has disclosed the credit ratings in both 2007 and in

2009. The disclosures on past due / impaired assets were presented by 9 companies in 2007 and

11 companies have disclosed this information in 2009. This increase though, is not statistically

significant to reject the H0 hypothesis and consequently no significant increase in the credit risk

disclosure has been observed, the quality of the disclosure consequently is not significantly

different in 2009.

55

The quantification of the market risk disclosures and the difference of this between 2009 and

2007 are researched based on the next hypotheses and T-Test analysis:

56

H0:

No significant difference exists in the average amount of pages dedicated to market risk in

2009 compared to 2007.

H1:

A significant difference exists in the average amount of pages dedicated to market risk in 2009

compared to 2007.

Table 13 –T-Test results

The quality of the market risk disclosure is measured by investigating the financial statements’

disclosure concerning the presence of the VaR analysis, the sensitivity analysis, interest risk

disclosure, currency exchange risk disclosure, equity price risk disclosure and the combination

of these. The presence of the factors is an indication on the quality, of which the results are

compared based on the 95% confidence interval percentage using the T-Test:

H0:

No increase exists in the VaR analysis, sensitivity analysis, interest rate risk, and currency

exchange rate risk and equity price risk disclosure in 2009 compared to 2007

H1:

An increase exists in the VaR analysis, sensitivity analysis, interest rate risk, and currency

exchange rate risk and equity price risk disclosure in 2009 compared to 2007

57

Table 14 –T-Test results

In addition, these results show no significant changes between 2009 and 2007, neither as

separate factors nor as combined. Consequently, the H0 hypothesis is not to be rejected and no

significant quality change in the market risk disclosures has been identified.

The fourth research question relates to the disclosures of the liquidity risk:

H4A:

Compared to the annual financial statement 2007 in the annual financial statement 2009 the

Liquidity risk disclosures are not significantly more

58

H4B:

Compared to the annual financial statement 2007 in the annual financial statement 2009 the

Liquidity risk disclosures are significantly better

The hypotheses concerning H4A are formulated and researched as follows:

H0:

No significant difference exists in the average amount of pages dedicated to liquidity risk in

2009 compared to 2007.

H1:

A significant difference exists in the average amount of pages dedicated to liquidity risk in

2009 compared to 2007.

Table 15 –T-Test results

No significant changes in the average amount of pages dedicated to liquidity risk are noted, and

consequently the H0 hypothesis is not to be rejected.

The quality of the liquidity risk disclosure is measured with the next research question and

hypotheses:

H4B:

Compared to the annual financial statement 2007 in the annual financial statement 2009 the

Liquidity risk disclosures are significantly better

59

H0:

No increase exists in the maturity analysis of assets and liabilities in 2009 compared to 2007

H1:

An increase exists in the maturity analysis of assets and liabilities in 2009 compared to 2007

The outcome of the T-Test shows no significant changes and consequently the H0 hypothesis is

not to be rejected.

Table 16 –T-Test results

The final hypothesis relates to the annual report and if this is correlated with the amount of

pages of the financial statements and the increase in pages of the financial statements.

H5A:

A correlation exists in the increase in the amount of pages dedicated to risk disclosures and the

increase in the amount of pages of the annual report.

H0:

The increase in the amount of pages dedicated to risk disclosures is not correlated with the

increase in the amount of pages of the annual report concerning the period 2009-2007

60

H1:

The increase in the amount of pages dedicated to risk disclosures correlates with the increase

in the amount of pages of the annual report concerning the period 2009-2007

These hypotheses are tested by the use of Pearson’s correlation coefficient with α = 0.05 and

shown in Table 17.

Table 17 –correlation

Based on the Pearson’s correlation coefficient, a positive correlation is observed between the

increase in the amount of pages of the risk disclosures and the increase in the amount of pages

of the annual report. The correlation is not significant on the selected significance level and

consequently the H0 hypothesis is not to be rejected.

The final research question relates to the correlation between the financial statements and the

annual report, of which the financial statements are an integral part:

H5B:

A correlation exists between the amount of pages of the annual accounts and the amount of

pages of the financial statements.

In order to validate the hypothesis it has been defined in the H0 and H1 hypotheses and the

results are compared based on the Pearson’s correlation coefficient with α = 0.05:

61

H0:

No correlation exists between the amount of pages of the annual accounts and the amount of

pages of the financial statements

H1:

A correlation exists between the amount of pages of the annual accounts and the amount of

pages of the financial statements.

Table 18 –Correlation

Table 18 shows that a significant correlation exists between the amount of pages of the annual

report and the amount of pages of the financial statements, rejecting the H0 hypothesis.

In this paragraph, in table 5, is presented that the amount of pages in the annual report since

2007 have increased with 10.4% and the amount of pages in the financial statements since 2007

have decreased with 3.1%. This looks like a contradiction with table 18; table 19 confirms that

a correlation exists between the increase/decrease in the amount of pages of the annual report

and the financial statements:

Table 19 –Correlation

62

The empirical research performed showed no significant changes in reporting of IFRS 7

concerning the period 2007-2009. Although Bischof had noted a significant difference after the

implementation of IFRS 7 (Bischof 2009), no significant changes are noted in the periods after

the implementation. During the research, is observed that the financial statements are not

increasing in the amount of pages as they did before 2007, and no duplication of information

regarding the IFRS 7 risk disclosures was noted between the selected annual report and the

financial statements.

§ 6.3 Summary

In order to investigate the effect of the IFRS 7 risk disclosures on the financial statements

concerning the period 2007 – 2009 for both quantitative and qualitative variables, in this

chapter the empirical part of this research has been performed. .The quantitative variables were

the amount of pages dedicated to the disclosures and the qualitative variables were related to

the different components disclosed in the IFRS 7 risk disclosures.

The total population of the selected financial statements consisted out of 57 financial

statements of 19 financial industry companies listed on the Euronext as large caps concerning

the years 2007, 2008, 2009.

The summary of the empirical research performed in this chapter is presented in table 20

combined with the results of the research.

63

Table 20 –Empirical research results

What is the effect of IFRS 7 on the financial statements of the companies? was the main

question of this paragraph and the empirical research showed that after the introduction of

IFRS 7 in 2007, the impact on the financial statements was found not to be significant.

Although the guideline has sufficient space left concerning the management to disclose the

risks that are deemed to be relevant, most companies have chosen to comply with IFRS 7 by

disclosing what is purely necessary and no significant evolution is noticeable in these

disclosures. The empirical part of this research did show an increase in the amount of pages of

the annual accounts with an average of 30 pages, while the average amount of pages of the

financial statements has decreased with 4 in three years. To investigate whether the

management still prefers to disclose the risks in these sections of the annual accounts, further

research could focus on the MD&A report.

64

Chapter 7: Summary and Conclusion

§ 7.1 Summary and conclusion of the Master Thesis

The main question of this research is

What are the developments of the IFRS 7 risk disclosures in the financial statements?

In order to be able to provide an answer to the main question, four sub questions have been

formulated which combined provide the answer to the main question. The four questions used

in this thesis are:

1. What are financial statements and what purpose do they have concerning the shareholders?

2. What is IFRS 7 and what is its purpose?

3. What impact has risk reporting had on the financial statements?

4. What impact have the IFRS 7 risk disclosures had on the financial statements after its implementation?

The first three questions are investigated by performing literature review in the first chapters of

the thesis, while the last question is answered after an empirical research is performed on the

financial statements of European financial institutions.

The purpose of the financial statements is to provide the shareholders with information on the

performance of the company the shareholders are investing in and to support the investor’s

future investment decisions relating to the specific company. As showed by the agency theory

in chapter 1, the shareholders can be qualified as principals and the management as agents,

acting in self-interest. In order to align the goals of the agents to the goals of the principals, the

principals are in need of relevant information, which can be presented in the financial

65

statements. Consequently, the purpose of the financial statements is to provide the shareholders

with relevant information on which they can base their decisions.

Financial statements are of value to the shareholders, as long as they are presented in a

consistent way of accounting and they are even more of value if they can be compared to other

companies. This is why accounting principles are relevant concerning reporting by the

companies and why the regulators have decided to harmonize the accounting principles

concerning stock exchange quoted companies in Europe by obliging the use of IFRS by these

companies.

The past credit crisis, mostly related to financial instruments and the lack of transparency in the

risks involved with financial instruments, resulted in additional risk disclosures requirements

by IFRS: IFRS 7. This standard obliges the companies to disclose the risks involved with the

financial instruments they are exposed to and the mitigation of these risks.

IFRS 7 in 2007 was implemented and after that year compared to the years before the quality of

these risk disclosures has increased significantly. Throughout the years, in addition, the size of

the financial statements has increased, and it became questionable whether the financial

statements contain the same information that is already presented in the annual report.

Furthermore recent studies had shown that the quality of the risk disclosures in general have no

influence on the share price of the company.

The empirical part of this research shows that concerning the period 2007-2009 no significant

changes in IFRS 7 risk reporting exist. Both the quantity and the quality of these risk

disclosures are not significantly different in 2009 compared to 2007. The research did show

that the annual report has increased in size, but the financial statements did not. A conclusion

could be that the annual report is of more importance to the shareholders than the financial

statements are which could be a question to be researched in following studies.

Despite the credit crisis caused by the financial instruments, no significant changes are

observed in IFRS 7 risk disclosures. The research did show that most companies have

66

voluntarily disclosed the impact of it in a separate note in the annual report. Value relevance of

the annual report in addition could be subject concerning future research.

Answering the main question concerning the research is that no significant developments in the

financial statements after the implementation of IFRS 7 have been found. The credit crisis and

the current market conditions have not caused the IFRS 7 risk disclosures to change neither in

quantity, nor in quality.

§ 7.2 Limitations and recommendations for future research

Concerning this research certain limitations exist that need to be taken into account. The first

limitation is the total population used concerning the empirical research, which consists out of

57 financial statements in total, but 19 financial statements per period. The size of the

population investigated could be questionable, especially taking into account the standard

deviation calculated in the research. Consequently, the results of this research do not

necessarily apply to all the IFRS financial statements.

A second limitation is the selection of the companies investigated which only consisted of large

caps of the financial industry companies. This population constitutes only large financial

institutions, which are specialized in financial instruments. Consequently, a different

population could result in significantly other outcome.

The research methods used in addition have their limitations, although the limitations are

limited. The outcome of the methods used, has not been used to confirm a research question,

but rather to exclude the significance. This approach leads to a negative presentation of results,

providing no statistical evidence on existence of a relationship.

Future research could focus on all listed financial industry companies, and not only large caps,

to investigate the impact on the reporting requirements in smaller companies. In addition this

will increase the sample size, providing more statistical evidence concerning the empirical

research and conclusion.

67

In addition, other than financial industry companies could be the subject concerning future

research. Current literature and research focuses primarily on financial institutions relating to

IFRS 7 risk disclosures. Expanding the horizon concerning empirical research could create new

information.

68

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Appendix I

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Appendix II

2007 observations

2008 observations

2009 observations

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Appendix III

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