Document Type : Research Paper


1 Ph.D. Candidate of Accounting, Faculty Management& Accounting, Shahid Beheshti University. Tehran, Iran

2 Associate Professor of Accounting ,Faculty of management and Accounting, Shahid beheshti university

3 Assistant Professor,, Management and Accounting faculty, Shahid Beheshti University, Tehran, Iran.

4 Associate Professor , Accounting ,Faculty of, Allameh tabataba'i University


This study aims to investigate how a change in the accounting method of calculating bank loan loss provisions affects financial reporting quality of banks. In doing so, the current theoretical literature on the topic of the research has been described and the conflicting arguments in the previous research have been expressed. Subsequently, using the transfer matrix method, loan loss reserves have been calculated for a sample of 17 banks, assuming that the method approved by international accounting standards (expected credit loss model) has been applied. Then, the research variables’ data, spanning from 2017 to 2021, was collected and analyzed under two assumptions: employing the current method and using the expected credit loss model. Then, the research hypothesis was tested using the least squares method. The results of the research show that the relationship between the change in the reporting system and discretionary accruals as an indicator of the financial reporting quality is negative and significant. Therefore, a change in the current accounting methods used for the calculation of loan loss reserves causes reduction in discretionary accruals and improvement of financial reporting quality. On the other hand, the results of this research show that large banks are more interested in using discretionary accruals and applying profit management than small banks, which can be caused by the "political costs theory".


The quality of financial reports remains an important issue, garnering serious attention from regulators, professional accountants and other users of financial information. This is due to the irreplaceable role of financial reporting quality in reducing agency problems and information asymmetry (Anto & Yusran, 2023). In the banking system, the method used for calculating loan loss reserves is one of the most important factors affecting the quality of financial reporting. This is because the loan loss provision, typically the largest bank accrual, is highly correlated with banks' net income and represents the most prevalent accrual. Loan loss provisions are accruals of fundamental importance to bank performance, and they also reflect information asymmetry (Beatty & Liao, 2014).
Despite the great importance of loan loss calculation method on banks’ financial reporting, few studies have examined the effectiveness of the current method used in Iranian banks. Additionally, research exploring the impact of changes in the loan loss calculation method on the quality of banks' financial reporting has been limited. Given this context, it becomes imperative to investigate the influence of this crucial variable on the quality of bank financial reporting. Conducting this research, particularly in Iran with its bank-oriented economy, can enhance the quality of financial reporting. This improvement would be achieved by selecting the optimal method for calculating loan loss reserves, thereby increasing the transparency of information in banks.
Research Question(s)
The main question of this research is as follows:
Does the change in the bank loan loss reserves calculation method have a significant effect on the quality of banks financial reporting?

Literature Review

In the current literature, two predominant views exist regarding the impact of changes in accounting methods on the quality of financial reporting. The first view posits that changing accounting methods, equated to adopting international accounting standards, enhances financial reporting quality. Conversely, the second view contends that there is either no relationship or a negative relationship between the adoption of new accounting methods and financial reporting quality. Mensah (2021) demonstrated a significant negative relationship between the use of new accounting methods and profit management, suggesting that methods endorsed by international accounting standards elevate the quality of companies’ financial reporting. This finding aligns with the conclusions of researchers like Nikhil et al. (2023), Ozili and Outa (2019), and Haapamakia (2018). On the contrary, Oppong & Bruce-Amartey (2022) examined the effects of new standards and corporate governance on accounting quality in Ghana, discovering that the implementation of new standards adversely impacts accounting quality. Similar conclusions were drawn by researchers like Suadiye (2017) and Campa & Donnelly (2016).


This research employed a quantitative approach to examine the effect of changes in accounting methods on the quality of financial reporting. Initially, data was gathered using the current numbers of the financial statements of selected banks. Subsequently, the loan loss reserve calculation method was altered, and the research data was re-estimated using the new accounting method, aided by a transition matrix and the IFRS 9 formula. The research hypothesis was then tested using both datasets. The sample comprised data from 17 Iranian banks spanning the years 2017 to 2021. This data was collected using the Rahavard Novin database, the banks' financial statements, and analyzed using SPSS version 27 and EViews version 10 software, employing the least squares regression method.


The research findings reveal a significant negative relationship (at a significance level of 0.000) between the financial reporting system and discretionary accruals. This outcome suggests that a change in the method of calculating bank loan loss reserves, coupled with the adoption of a new method, leads to a decrease in discretionary accruals and in banks' earnings management practices. Additionally, the research indicates that the relationship between discretionary accruals and cash flow from operating activities, banks' profitability, and financial leverage is significantly negative. In contrast, the relationship between discretionary accruals and bank size is positive and significant. However, there appears to be no significant relationship between growth rate and asset turnover with discretionary accruals at the 5% significance level.


The results of this research show that adopting the expected loss method, as opposed to the current method used in Iranian banks for calculating loan loss reserves, enhances the transparency of bank information and improves the quality of financial reporting. By reducing discretionary accruals, the new reporting system encourages banks to utilize fewer accruals, likely leading to a decrease in the use of profit management methods. Consequently, the adoption of IFRS in Iranian banks positively impacts the industry and its stakeholders. Furthermore, the research reveals that larger banks tend to employ discretionary accruals and engage in profit management more than smaller banks, a phenomenon potentially explained by the "political cost theory".


The relationship between the quality of financial reporting and changes in bank loan loss reserves is positive and significant. Thus, the research hypothesis is confirmed, supporting the perspective of the first group (as discussed in the Literature Review section) in the context of Iranian banks. Based on these findings, it is recommended that the central bank mandate banks to disclose their reserves using the expected credit loss method as an initial step. Subsequently, banks whose reserves significantly deviate from the amounts calculated according to IFRS standards should be compelled to adjust their reserves over several years. This gradual approach aims to align the current reserves more closely with those calculated using the expected credit loss method.


Main Subjects

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