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‘Fair Value’ of Core Deposits in the EU version of IFRS: A Critical Review
Author(s) -
Jílek Josef
Publication year - 2016
Publication title -
australian accounting review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.551
H-Index - 36
eISSN - 1835-2561
pISSN - 1035-6908
DOI - 10.1111/auar.12127
Subject(s) - fair value , accounting , historical cost , comparability , international financial reporting standards , prudence , core (optical fiber) , financial instrument , equity (law) , valuation (finance) , mark to market accounting , economics , business , unit of account , value (mathematics) , financial institution , actuarial science , payment , accounting information system , financial accounting , finance , philosophy , materials science , mathematics , theology , combinatorics , machine learning , political science , computer science , law , composite material
The paper presents seven impacts of the introduction of core deposits models in credit institutions into International Financial Reporting Standards (IFRS). First, the equity of the credit institution will be higher for the core deposit premium adjusted for deferred tax. Second, the models make it possible for some financial instruments (e.g., interest rate swaps where the credit institution receives fixed payments and pays floating payments) to be designated as hedging instruments. Third, there is lower comparability of financial statements, as no standard business model of core deposits exists. Fourth, the models can be understood at the next step of relaxing of prudence (conservatism) and neutrality of IFRS. Fifth, there is inconsistency in the core deposit definition. By definition, these deposits should be stable for a long (infinite) period. Then, the present value of core deposits should be zero which is flawed. Sixth, there is inconsistency in the interest rate risk definition. Seventh, according to available information, the core deposits models have not been introduced into accounting in any national generally accepted accounting principles (GAAP) such as US GAAP. Thus the fair value of core deposits should be equal to the nominal value of these deposits. The accounting should not reflect the core deposits models. The carve‐out in the European version of IFRS should be removed.