The Impact of Adoption of International Financial Reporting Standards on Canadian Chartered Banks, with Focus on Residential Mortgage Loans

Abstract

king Canada’s accounting standards comparable with those of other countries1, enables investors to better make financial comparisons across countries. This change in accounting standards affected how asset holdings are recognized, measured, disclosed and presented. In turn, this resulted in Canadian chartered banks (CCB) having to change what constituted a holding on their balance sheet as well as how such holdings were valued. This paper explores the impact the IFRS transition has had on the balance sheet of CCB. As the major impact was on residential mortgage loans, this paper focus on how the transition affected CCB’s holdings of residential mortgages. This paper refers to previous research methodology to understand the key areas of impact. It also reviews the first annual reports under IFRS for the Big-Six banks. This review specified the impact of the IFRS adoption to the assets portfolio reported on their balance sheet. Time series techniques were then applied to all the CCB, not only the Big-Six. The results of the analysis show that the IFRS transition had an impact on residential mortgage loans, increasing holdings by 11% at the time of transition. The findings of this paper open to further research on the cyclicality of residential mortgages post-IFRS and the impact of more recent requirements applicable to residential mortgage loans, such as stress-tests and further IFRS requirements, both having come into effect in 2018. Future research on these topics could provide further insights on the risk management decisions affecting residential mortgages loans. For instance, it could show if individuals are opting to decrease their residential mortgage debt, such as seeking a house at a lower price to meet the stress test requirements or if they are seeking alternative funding outside Canadian chartered banks. Effective in 2018, banks also have to disclose further details on their credit risk as part of their financial statements when issuing loans while also meeting funding ratios. These additional requirements are expected to impact their assets portfolio and their risk assessment decision when providing loans.