KK

Master Thesis
IFRS 7 Risk disclosures
Youri Pasternak
Date: 03-01-2011
Student number: 259128
Coach: E. A. de Knecht RA
Co reader:
Table of Contents
Table of Contents.....................................................................................................................................2
Chapter 1: Introduction.............................................................................................................................4
1.1 Background.................................................................................................................................
1.2 Research Question........................................................................................................................
1.3 Research Methodology.................................................................................................................
1.4 Structure......................................................................................................................................
1.5 Demarcation and limitations..........................................................................................................
Chapter 2: Financial statements...............................................................................................................10
2.1 Introduction...............................................................................................................................
2.2 Agency theory............................................................................................................................
2.3 Financial accounting...................................................................................................................
2.4 Accounting principles.................................................................................................................
2.5 Risk Reporting...........................................................................................................................
2.6 Summary...................................................................................................................................
Chapter 3: IFRS 7..................................................................................................................................19
3.1 Introduction...............................................................................................................................
3.2 Content of IFRS 7......................................................................................................................
3.3 Summary...................................................................................................................................
Chapter 4: Literature review....................................................................................................................28
4.1 Introduction...............................................................................................................................
4.2 Literature review........................................................................................................................
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...................................................................................................................................
Chapter 5: Empirical research.................................................................................................................43
5.1 Introduction...............................................................................................................................
5.2 Methodology..............................................................................................................................
5.3 Approach...................................................................................................................................
Selected population.................................................................................................................46
Chapter 6: Results..................................................................................................................................47
6.1 Introduction...............................................................................................................................
6.2 Results......................................................................................................................................
6.3 Summary...................................................................................................................................
Chapter 7: Summary and Conclusion.......................................................................................................64
7.1 Summary and conclusion of the Master Thesis..............................................................................
7.2 Limitations and recommendations for future research....................................................................
Literature...............................................................................................................................................68
Appendix I............................................................................................................................................71
Appendix II...........................................................................................................................................72
Appendix III..........................................................................................................................................74
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 companys 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 companys 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)
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.
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.
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.
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 dont 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 companys 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 sequentialplay 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 principals 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 selfinterest 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
companys 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 dont 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 70s 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 20 th 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 90s 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 107204JULY 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 (SarbanesOxley). 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 entitys 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

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
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the exposures and in which way the risks arise and the companys 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

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

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

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
companys 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 companys portfolio occurs caused by a
default or another credit event (insolvency) with the participants in the portfolio. An
example is a doubtful debtors 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
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
the total population of the client portfolio, while the final stage should be to exclude the
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
Current assets and liabilities are assets and liabilities that are due in one year or sooner, which is the definition from
IFRS.
31
models, it is questionable though whether maximum loss information, the VaR model, is
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
32
an annual report. The research furthermore concludes that 76% of the companies selected,
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. Bischofs
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 overor 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).
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
37
financial statements. In addition, are often even communicated twice in both the MD&A 6 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
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:
credit-risk disclosures are significantly better.
H3A:
Market risk disclosures are significantly less
39
H3B:
Market risk disclosures are significantly less Market risk disclosures are significantly better
H4A:
Liquidity risk disclosures are not significantly more
H4B
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 & Tirados 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. Bischofs 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.
42
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 PWCs 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.
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.
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
52
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.
Figure 8 Annual report pages range
53
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
credit-risk disclosures are significantly more.
H2B
credit-risk disclosures are significantly better.
54
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:
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:
55
No increase exists in credit risk disclosures relating to credit ratings of the assets and past
due / impaired assets in 2009 compared to 2007
56
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:
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.
57
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:
58
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.
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
59
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.
60
The fourth research question relates to the disclosures of the liquidity risk:
H4A:
Liquidity risk disclosures are not significantly more
61
H4B:
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
H1:
A significant difference exists in the average amount of pages dedicated to liquidity risk in
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:
62
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.
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:
63
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
64
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 Pearsons correlation coefficient with = 0.05 and
shown in Table 17.
Table 17 correlation
Based on the Pearsons 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:
In order to validate the hypothesis it has been defined in the H0 and H1 hypotheses and the
results are compared based on the Pearsons correlation coefficient with = 0.05:
65
H0:
No correlation exists between the amount of pages of the annual accounts and the amount of
pages of the financial statements
H1:
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
66
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.
67
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.
68
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 investors
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
69
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
70
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.
71
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.
72
Literature
Bischof, J. (2009), The effects of IFRS 7 Adoption on Bank Disclosure in Europe, Accounting
in Europe, Vol. 6, No. 2, 2009, pages 167-194
Cabedo, D.J. & Tirado, J.M. (2004), The disclosure of risk in financial statements, Accounting
Forum, 28, pages 181-200
Deloitte (2006), Write to reason. Surveying OFRs and narrative reporting in annual reports,
online publication, pages 1-55
Duriau, V.J. et al. (2007), A content analysis of the content analysis literature in organizational
studies. Research themes, data sources, and methodological refinements, organizational
research methods, January 2007, pages 5-34
Ernst & Young (2008), IFRS 7 in the banking industry, Ernst & Young publication 2009, pages
1-37
Gassen J. & Schwedler, K., (2008), Attitudes towards fair value and other measurement
concepts: an evaluation of their decision-usefulness, Working Paper, Humboldt-Universitt
Berlin, pages 1-72
Groenland J., R. Daals and H. von Eije, (2006), De Tabaksblat risico-paragraaf in
Nederlandse jaarverslagen: een eerste analyse van inhoud en effect, Maandblad voor
Accountancy en Bedrijfseconomie, March 2006, pages 93-99
Hoogendoorn, M.N., Klaassen, J. & Krens, F., (2004), Externe verslaggeving in theorie en
praktijk, Reed Business Information, 4th edition
Hossfeld, C., (2004), The myth of comparable IAS financial statements: the case of European
banks, Working Paper, EAA 27th Annual Congress
Jensen, M.C. & Meckling, W.H., (1976), Theory of the Firm, Managerial Behavior, Agency
Costs, and Ownership Structure, Journal of Financial Economics, 1976, pages 305-360
KPMG, (2009), Focus on Transparency, Trends in the presentation of financial statements and
disclosure of information by European banks 2009, KPMG 2009 publication
Kunz et al. (2002), Agency theory, performance evaluation, and the hypothetical construct of
intrinsic motivation, Accounting, Organization and Society, 2002, vol. 27, pages 275-295
Marston, C. L. & Shrives, P.J. (1991), The use of disclosure indices in accounting research: a
review article, British Accounting Review, 23, pages 195-210
73
De Oude, A. (2009), Influence of IFRS on the value relevance of book values and earnings in
five European countries, Master Thesis Erasmus University Rotterdam
Noreen, E. (1988), The economics of Ethics: A new perspective on agency theory, Accounting,
Organization and Society, 1988, vol. 13 No. 4, pages 359-369
PWC, (2008), Accounting for change: transparency in the midst of turmoil. A survey of banks
2007 annual reports, PWC 2008 publication.
PWC, (2010), IFRS Disclosure checklist 2009, PWC 2010 publication
Radin, A.J. (2007), Have we created Financial Statement Disclosure Overload?, The CPA
Journal, November 2007, pages 6-9.
Stolowy, H. & Lebas, M.J. (2002), Corporate Financial Reporting A Global Perspective,
Thompson Learning, 2005 reprint.
Watts, R.L. & Zimmerman, J.L. (1978), Towards a positive Theory of the Determination of
Accounting Standards, the Accounting Review, January 1978, pages 112-134
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www.coso.org
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www.iasb.org
www.iasplus.com
www.PWC.com
www.kpmg.com
http://www.aegon.com/en/Home/Investors/Publications/Annual-reports/
http://www.ageas.com/en/Pages/annualreports_archive.aspx
http://www.axa.com/en/publications/annualreports/archives/
http://www.millenniumbcp.pt/pubs/en/investorrelations/financials/financialstatements/;jsessionid=Z3R1V42
AEHV3HQFIAMGCFEWAVABQYIY4
http://www.bes.pt/sitebes/cms.aspx?plg=308db8fc-3ddb-4c64-813c-65cad313a905
http://bpi.bancobpi.pt/index.asp?riIdArea=AreaDFinanceiros&riId=Freports
http://invest.bnpparibas.com/en/pid738/annual-report.html
74
http://www.nbb.be/pub/06_00_00_00_00/06_02_00_00_00/06_02_06_00_00/06_02_06_2001.htm?l=en
http://www.bollore.com/
https://www.cic.fr/fr/banques/le-cic/institutionnel/publications/rapports-annuels.html
http://www.cnp-finances.fr/eng/CNP_publications/Archives/2008/2008.htm
http://www.credit-agricole.com/en/Finance-and-Shareholders/Financial-reporting/Credit-Agricole-S.A.financial-results/Archives
http://www.deltalloydgroep.com/dl/web/FinancialInformationReports.htm
http://www.dexia.com/e/news/publications-arch.php
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http://www.ing.com/group/showdoc.jsp?docid=372285_EN&htmlid=440582_EN&menopt=ivr|pub|arc
https://www.kbc.com/MISC/D9e01/~E/~KBCCOM/~/-BZIZTPN/~-BZL19JQ
http://www.kbcancora.be/en/Functional/Search.aspx?keywords=annual+report
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75
Appendix I
76
Appendix II
2007 observations
2008 observations
78
2009 observations
79
Appendix III
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Master Thesis

IFRS 7 Risk disclosures

1.2 Research Question

1.3 Research Methodology

1.5 Demarcation and limitations

Chapter 2: Financial statements

2.2 Agency theory

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

2.3 Financial accounting

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

2.4 Accounting principles

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

2.5 Risk Reporting

3.2 Content of IFRS 7

Financial assets measured at fair value through profit and loss

Financial liabilities measured at fair value through profit and loss

Financial assets measured at amortized cost

Financial liabilities measured at amortized cost

Financial assets measured at fair value through other comprehensive income

Figure 4 Financial instruments on the balance sheet

Figure 5 Notes to the financial instruments

Figure 6 Levels of financial instruments

Figure 7 Extract from credit risk past due / impaired disclosure

Figure 8 Extract from liquidity risk disclosure

Figure 9 Extract from market risk disclosure

Chapter 4: Literature review

4.2 Literature review

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

Are the risks disclosed in the annual report?

Number of pages of the financial statements

Number of pages on risk reporting

KPMG, Ernst & Young, PricewaterhouseCoopers

Chapter 5: Empirical research

Table 1 Risk variables used

The findings per company, per year, are presented in

Table 5 Amount of pages in annual reports

Table 6 Risk disclosures

Based on the collected data, it is important to understand whether these differences in

Table 7 T-Test results

Table 8 T-Test results

Table 9 T-Test results

Table 10 T-Test results

Figure 8 Annual report pages range

Table 11 T-Test results

Table 12 T-Test results

Table 13 T-Test results

Table 14 T-Test results

Table 15 T-Test results

Table 16 T-Test results

The empirical research performed showed no significant changes in reporting of IFRS 7

Table 20 Empirical research results

Chapter 7: Summary and Conclusion

The main question of this research is

7.2 Limitations and recommendations for future research

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