DETERMINANTS OF ACCOUNTING CHOICE REGARDING LOCATION OF VOLATILITY: THE FVOCI OPTION - Early indications from the adoption of IFRS 9

Abstract

Purpose: With the introduction of IFRS 9, entities can elect to report changes in fair value of equity investments not held for trade in other comprehensive income or in profit and loss. The purpose of this paper is to present descriptive data on entities which made this choice. The purpose is also to find determinants of the choice made. Theory: This study has a framework consisting of positive accounting theory. Since the choice does not affect total equity, contracting incentives cannot explain the choice. Instead, the hypothesis development is based on assumptions related to empirical evidence of salient volatility avoidance, how the market values different performance statements and CEO job security. Method: Descriptive data is presented in tables and in text. Six hypotheses are tested using proxies in regression models. Result: Of the 115 entities which disclosed the choice, 73 percent elected to make use of the FVOCI option. 110 entities did not disclose the choice as of the fourth quarterly report of 2017. Higher level of materiality of equity investments not held for trade increases the probability that entities disclose the choice. One out of the six hypotheses was not be rejected; a higher share of independent board members in relation to inside board members on the board of directors increase the probability that entities will make use of the FVOCI option. Leverage was significant in the opposite direction to what was hypothesized; higher leverage increased the probability that entities choose FVPL. We found that materiality, CEO board membership, CEO incentives and higher perceived risk of the entity could not predict which choice was made.