2005 was a landmark year in the European Union's (EU) financial reporting history as all EU listed firms were required to switch from national accounting standards to IFRS. Using a sample of European commercial banks, this study explores two research questions within the framework of equity valuation theory: (i) whether the disclosed fair value estimates of loans and advances; held-to-maturity investments; deposits; and other debt, as well as the recognition of derivatives at fair value, are value relevant, (ii) whether the adoption of IFRS led to a reduction in European banks' cost of equity capital. The results show that the fair value of loans and advances and other debt are value relevant as is the recognition of derivatives at fair value. Further analysis revealed that the relevance of fair value of loans and derivatives is contingent on banks' financial health and earnings variability, respectively, as well as on the ability of countries to enforce IFRS. The findings also indicate that the cost of equity capital of European commercial banks decreased after the adoption of IFRS. However, banks domiciled in countries with continental accounting standards and weak enforcement rules experienced a greater reduction in their cost of equity capital.

About one-quarter of the world’s central banks apply IFRS with approximately a quarter more looking to IFRS for further guidance where their local standards do not provide enough guidance. Given the varied mandates and types of policy operations undertaken by central banks, there also exists significant variation in practice, style, and the extent of the financial disclosures in both the primary statements and in the note disclosures. By their nature, central banks are unique in their jurisdiction and so do not always have local practices and examples they can follow. Although the major accounting firms have created model disclosures intended for commercial banks, these are often not totally appropriate for a central bank. The application of IFRS across central banks differs based on the mandate of the central bank and the capacity of the accounting profession in the specific jurisdiction. An analysis of international practices, such as those undertaken in preparing these model statements, may help address questions about the structure of the statements themselves as well as the organization of the note disclosures. As a consequence, each central bank following IFRS has largely developed its own disclosures with only limited reference to others. Input from the external auditors has been significant, but some of this has been determined by the approach used by the specific auditor’s style for commercial banks rather than central banks. Auditors do not always fully appreciate the differences between a commercial bank and a central bank, which has a different role and undertakes transactions to meet its policy objectives. This has often led to an over emphasis of items not material in the context of a central bank and insufficient disclosures on operations or accountabilities specific to the functions of the central bank.

Despite considerable progress on political and economic convergence over the last decade, financial structures of individual countries within the EU remain diverse. This book considers the future prospects of the banking industry in the context of enlargement, application of the IFRS and a potential new member country, Turkey.

The effects of disclosure level on the cost of equity are a matter of considerable interest and importance to the financial reporting community. Economic theory indeed claims that commitment to increased level of disclosure reduces the cost of capital component that arises from information asymmetries. Accordingly, this paper investigates the effects of IFRS adoption in Europe on the cost of equity for the bank industry. In doing so, it performs an event study, which isolates the effects of accounting changes on the cost of capital from institutional and enforcement mechanisms. This study shows that IFRS adoption has exerted, on average, a positive effect on the cost of capital for the bank industry at least in the very short run. Firms adopting IFRS seem to have experienced a lower cost of equity in the period immediately subsequent the release of financial reporting according to the new accounting standard set.