Using business models to drive classification: the case of debt instruments in the financial services sector

Date
2018
Authors
Holmes, Dominique
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Abstract
Faithfully representing financial instruments in financial statements is critical to the sustainable functioning of the global economy. This was highlighted in the aftermath of the Global Financial Crisis (GFC) where the relative financialisation of the global economy was implicated as contributing to the crisis (Barth and Landsman, 2010; Laux, 2012; Zhang and Andrew, 2014). Following the GFC, efforts to develop an improved accounting standard for reporting financial instruments were accelerated (IASB, 2014). This culminated in the release of IFRS 9 which uses the business model to determine the accounting treatment of financial assets. The standards’ predecessor, IAS 39, used the concept of management’s intention to determine accounting classification. This was perceived as being unnecessarily complex (IASB, 2008). Accounting commentators question whether the move to a business model basis is in substance different from management’s intention (Leisenring et al., 2012). Arguing that representing a contractually identical asset differently, based on its use, potentially undermines faithful representation and impairs comparability. This has led to questioning whether the use of a financial asset has the ability to alter its economic substance (Leisenring et al., 2012; Barth, 2013). This thesis explores IFRS 9’s logic of using the business model to determine the classification of financial assets in the financial services sector. Initial insights are obtained by conducting detailed interviews with some of South Africa’s leading practical and technical minds. These insights pertain to differences between management’s intention and the business model, whether a financial asset can be ‘used’ and how this may impact the economics of the financial. This research finds that financial assets can be used by financial institutions for various purposes. These are consistent with the business models of IFRS 9. Further, this thesis finds that communicating these alternate ‘uses’ is important to represent the differing economics of those assets. Participants also indicate that the business model enhances comparability through enabling comparison between similar business models, as opposed to accounting for identical financial assets in the same way. This thesis contributes to the growing calls for research into business models in financial reporting (EFRAG, 2010; Nielsen and Roslender, 2015). This thesis is also the first to provide the perceptions of South African experts on IFRS 9’s logic of using the business model as a method for classifying, measuring and presenting financial instruments.
Description
A dissertation submitted in partial fulfilment of the requirements for the degree of Master of Commerce (Accounting) to the Faculty of Commerce, Law and Management, University of the Witwatersrand, Johannesburg, 2018
Keywords
Global Financial Crisis (GFC), Global economy, Financial instruments, Financial statements, IFRS 9, IAS 39, Financial Services sector, Debt instruments
Citation
Holmes, Dominique Rose-marie (2018) Using business models to drive classification :the case of debt instruments in the financial services sector, University of the Witwatersrand, Johannesburg, <http://hdl.handle.net/10539/27090>