Incompatibilities of Using the IFRS Fair Value Basis in the Iranian Banking Business Framework

Document Type : Original Article

Authors

• Elias Badri ¹
• Ahmad Badri ²

¹ financial markets department, Monetary and Banking Research institute, tehran, iran

² Management and Accounting, shahid beheshti university, tehran, iran

10.22067/ijaaf.2023.42355.1131

Abstract

Fair value is one of the primary measurement basis in IFRS, especially for financial instruments. Since this measurement basis is derived from market logic, it can only work correctly if the business of the financial reporting unit is also consistent with this logic. The Banking business model as a financial intermediary is attracting resources and allocating them to resource applicants. This study investigates the compatibility of Iranian banking business with the fair value measurement logic described in IFRS. Our research methodology includes; a systematic review of IFRS Standards, literature, global experiences of implementing fair value, and a questionnaire (including 4 topics and 28 questions). We sent the questionnaire to four groups of respondents, including banks, Independent auditors of banks, supervisory institutions, academic experts and researchers, to collect Professional perspectives and opinions. Finally, we analyzed responses to our questionnaire (with a 90% rate of return) using a fuzzy logic method. Findings indicate that the banking business framework in Iran is influenced by three main factors: legal, policy, and managerial structure. Each of these factors imposes restrictions on the banking business, creating a deep gap between market logic and what runs in Iran’s banking business. Therefore, the possibility and quality of fair value implementation in the financial reporting of Iran's banking industry will depend on when and how to fill this gap.

Keywords

• Fair Value
• IFRS
• Iranian Banking Business
• Legal Structure
• Policy Structure
• Managerial Structure

Main Subjects

• Finance

---

©2023 The author(s). This is an open access article distributed under Creative Commons Attribution 4.0 International License (CC BY 4.0).

References

1. Aghili Kermani, P. (2002). Risk Management in Traditional Banking Compared to Interest-Free Banking. In Proceedings of the 13th Islamic Banking Conference, Tehran: Higher Institute of Banking (In Persian).
2. Alimoradi, M., Aliahmadi, S., and Foroghi, D. (2019). The Effect of Managers Discretion in Fair Value Measurement on Investment Selling Decisions. Journal of Accounting Advances, 11(2), pp. 253-284. https://doi.org/10.22099/jaa.2019.32550.1831
3. Badia, M., Duro, M., Penalva, F., and Ryan, S. (2017). Conditionally conservative fair value measurements. Journal of Accounting and Economics, 63(1), pp. 75-98. https://doi.org/10.1016/j.jacceco.2016.10.006
4. Barth, M. E., and Landsman, W. R. (1995). Fundamental issues related to using fair value accounting for financial reporting. Accounting Horizons, 9(4), pp. 97.
https://www.proquest.com/openview/7d3c88102eced284d3b22d35ab95de2f/1?pq-origsite=gscholar&cbl=3330
5. Basel Committee On Banking Supervision, 2015, Guidance On Credit Risk And Accounting For Expected Credit Losses
6. Fiechter, P., and Novotny-Farkas, Z. (2017). The impact of the institutional environment on the value relevance of fair values. Review of Accounting Studies, 22(1), pp. 392-429. https://doi.org/10.1007/s11142-016-9378-7
7. Golmohammadi, M., and Rahmani, A. (2018). Technical challenges of implementing fair values in financial reporting of Iran: emphasizing on IFRS13 requirements. Journal of Accounting and Auditing Review, 25(3), pp. 387-414 (In
Persian).https://doi.org/10.22059/acctgrev.2018.259285.1007908
8. Shamkuts, V. (2010). Fair Value Accounting, University of Iceland, Faculty of Business, Unpublished Master's degree thesis. Reykjavik, Iceland. http://skemman.is/stream/get/1946/4234/12284/1/Thesis_fixed.pdf
9. Poon, W. W. (2004). Using fair value accounting for financial instruments. American Business Review, 22(1), pp. 39-41.
10. Thornton, G. (2011). IFRS News special edition. USA: Grant Thorton International Limited. United States
11. Beatty, A., Chamberlain, S., and Magliolo, J. (1996). An empirical analysis of the economic implications of fair value accounting for investment securities. Journal of Accounting and Economics, 22(1-3), pp. 43-77. https://doi.org/10.1016/S0165-4101(96)00429-6
12. Heaton, J. C., Lucas, D., and McDonald, R. L. (2010). Is mark-to-market accounting destabilizing? Analysis and implications for policy. Journal of Monetary Economics, 57(1), pp. 64-75. https://doi.org/10.1016/j.jmoneco.2009.11.005