Measuring and reporting expected credit losses and determining the level of compliance with international accounting standards: An application to banking sector

Measurement of expected credit losses in the scope of IFRS 9 Financial Instruments standard depends on criteria left to companies' discretion like definition of default and significant increase in credit risk and assumption and estimation about forward looking macroeconomic indicators, scenarios and amounts and timing of recoveries from borrowers. It is important to disclose expected credit losses in accordance with IFRS 7 Financial Instruments: Disclosures standard in order to allow users of financial statements to accurately assess credit risk and asset quality of banks, to increase transparency, to allocate resources in capital market efficiently and to limit earnings management opportunities. For this reason, in the study the level of disclosure compliance related to expected credit losses and the factors affecting these levels are examined in order to provide guidance for regulatory authorities and banks' own management on the steps to be taken to increase the level of disclosure compliance. In the scope of the research, 2018 and 2019 annual reports of deposit and participation banks listed on Borsa Istanbul and Financial Times Index of London Stock Exchange have been read. Disclosure compliance scores based on a self-constructed disclosure index consisting of 65 disclosure items for 2018 and 61 disclosure items for 2019 in IFRS 7, IFRS 9 and IAS 1 standards related to expected credit losses, have been calculated by using unweighted dichotomous method (Cooke's Method). Hypotheses developed in order to determine factors affecting the disclosure compliance scores of the banks listed on Borsa Istanbul, have been tested by Spearman rank correlation and Pearson correlation. Moreover, in order to determine the impact of different accounting cultures on the level of disclosure compliance, compliance levels of banks listed on Borsa Istanbul of Turkey which is the part of code law system, have been compared to the ones of the banks listed on London Stock Exchange of United Kingdom, which is the part of common law system. As a result of the research, the average disclosure compliance levels of the banks listed on Borsa Istanbul were calculated as 52,9% for 2018 and 51,6% for 2019. It is observed that disclosure compliance scores of the banks are positively associated with asset size and their shares being traded on the stock exchange of another country as well. It is concluded that the ratings of the banks included in the BIST Corporate Governance Index have a positive linkage with the disclosure compliance scores of these banks. In addition, the level of disclosure compliance increased with the experience gained after the first year the Standard applied. The average disclosure compliance levels of the banks traded on Financial Times Index of London Stock Exchange were calculated as 83,2% for 2018 and 83,3% for 2019, significantly higher than those of the banks traded on Borsa Istanbul. Therefore, it can be said that accounting culture and law system may affect disclosure compliance. In addition, suggestions have been made to increase the average disclosure compliance level of banks traded on Borsa Istanbul, based on the research findings.