Enhancing the Transparency of Bank Fair Value Reporting

Following the financial crisis, the application of fair value accounting to banks’ financial reporting has received considerable
attention. Despite this controversial practice, this paper suggests that an important aspect of fair value accounting has
been neglected. This paper argues that the complex framework under IFRS governing the reporting of fair value gains
and losses impairs the ability of ordinary investors to understand the impact of such gains and losses on banks’ reported
income. It reviews the accounting framework, including both the October 2008 relaxation of reclassification options under
the existing IAS 39 standard, and the IASB’s phased replacement of IAS 39 with IFRS 9. This paper draws on the recent
financial statements of large U.K. banks to illustrate the complexities. The paper concludes that IFRS 9 brings welcome
simplification. However, the new standard reinforces the place of fair value measurement in banks’ financial reporting and
still leaves obstacles to understanding the impact of fair value movements on banks’ reported income.