Financial Instrument Disclosure of Financial Performance of Jordanian Commercial Banks

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University of California, Santa Barbara
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This section aims at providing the results concerning the level and proportion of banks disclosing the financial instruments. The section provides the details of Jordanian banks companies disclosing FI-related information as per the accounting standards under IFRS 7, IAS 32, and IAS 30.

Table 1:

Descriptive Statistics of Jordanian Commercial Banks FI Disclosure (2007 2000)

Overall Jordanian Bank FI Disclosure in 2007 Overall Jordanian Bank FI Disclosure in 2008 Overall Jordanian Bank FI Disclosure in 2009

N Valid 12 12 12

Missing 0 0 0

Mean 12.25 16.75 17.75

Median 13.00 18.00 19.00

Mode 9 20 9a

Std. Deviation 5.242 4.025 4.330

Variance 27.477 16.205 18.750

Skewness-1.078 -1.336 -1.570

Std. Error of Skewness.637 .637 .637

Kurtosis 1.277 .617 1.493

Std. Error of Kurtosis 1.232 1.232 1.232

Range 18 11 13

Minimum 0 9 9

Maximum 18 20 22

Sum 147 201 213

Percentiles 25 9.00 14.75 17.25

50 13.00 18.00 19.00

75 16.75 20.00 20.75

a. Multiple modes exist. The smallest value is shown Readily available information for 12 listed commercial banks operating in Jordan was used for the analysis. The financial statements for the financial years 2007 2009 were used to derive data based on disclosure index consisting of 39 items. As it can be seen in Table 1, the minimum number of items disclosed were zero (due to unavailable data for one bank in 2007) and the maximum item were 18 in 2007. The banks increased the number of items disclosed steadily in subsequent years to up to 22 in 2009. As compared with the small number of financial instruments disclosure in 2007 (M = 12.75, S.D = 5.242), the level of disclosure increased notably in 2008 and 2009 (M = 16.75, S.D = 4.025 and M = 17.75, S.D = 4.330 respectively).

It can also be observed from the median values of the banks FI disclosures results in table 1 that as of 2009, only half of the banks reported 19 items and above. This is significantly higher than in 2007 (median = 13) and 2008 (median = 18). Considering that the number of items on the disclosure index were 39, it can be deduced that between 2007 and 2009, the majority of the listed commercial banks in Jordan could hardly disclose more than 50% of the financial instruments in their annual reports.

From the above data, it can be noted that although banks increased the level of disclosure of the financial instruments, scrutiny of the annual reports reveals gaps in providing clear information on key estimates or management judgments that are used in areas of uncertainty (e.g. valuation of financial instruments in the absence of quoted market prices). Perhaps it would be more insightful if banks made use of sensitivity analyses and discussed the related assumptions and probabilities of occurrence to enable users to form an opinion on the potential impact of changes in expectations. According to the standard disclosure standards, this is an important requirement that banks should provide all the relevant information to enable users to make informed decisions during the time of uncertainty. Besides, content analysis revealed that only some of the banks provided concise background information on the wider economic environment that the banks operated in to enable the heterogeneous users to understand the context for specific disclosures. However, more banks increased their disclosure of background information activity through 2008 and 2009, which contributed to the overall FI disclosure in Jordanian commercial banks.

The Financial Performance Jordanian Banks in the Period 2007 2008

Table 2:

Summary of Jordanian Commercial Banks Financial Performance (2007 2009)

Annual Net Profit 2007 Annual Net Profit 2008 Annual Net Profit 2009

N Valid 12 12 12

Missing 0 0 0

Mean 25507721.08 26640784.17 21036891.42

Median 12964410.00 15429585.50 13505274.50

Mode 6385123a 7824000a 1338383a

Std. Deviation 3.120E7 2.904E7 2.201E7

Variance 9.737E14 8.432E14 4.844E14

Skewness2.383 2.070 1.502

Std. Error of Skewness.637 .637 .637

Range 105078171 93498745 65224127

Minimum 6385123 7824000 1338383

Maximum 111463294 101322745 66562510

Percentiles 25 10621012.25 9483636.50 5980220.00

50 12964410.00 15429585.50 13505274.50

75 23515743.00 29717566.75 25504062.75

a. Multiple modes exist. The smallest value is shown Table 2 shows the summary of listed Jordanian Commercial banks financial performance for the period 2007 2009 in Jordanian Dinars (JOD). The minimum total net profits reported among the twelve banks were JOD 6,385,123 while the maximum net profit was JOD 11, 1463,294 in 2007. The minimum net profit fell significantly over the period to a minimum of JOD 1338,383 in 2009. However, maximum profits were reported to be JOD 66,562,510 in 2009, which is six fold that in 2007. On average, the banks reported mixed fortunes in 2007, 2008, and 2009. Overall, however, the financial performance declined in the 2007 2009 period.

The impact of Overall Financial Instrument Disclosure of Financial Performance of Jordanian Commercial Banks

Table 3 provides insights into the relationship between overall FI disclosure and financial performance for the period 2007 2009. A scan through the table shows that there was a positive and significant relationship (p<.05) between overall financial disclosure in 2007 and financial performance in that year. It should be noted that the lowest level of disclosure was reported in 2007. As the level of overall financial instrument disclosure increased in 2008, it has a statistically insignificant (p>.05) but a negative correlation (correlation coefficient = -.108). Additionally, there was a weak association between the increased level of financial instrument disclosure in 2009 and the overall net income of the banks (correlation coefficient = .099).

Table 3: The correlation matrix of Overall FI Disclosure against financial performance

Overall FI Disclosure 2007 Overall FI Disclosure 2008 Overall FI Disclosure 2009 Net Income 2007 Net Income 2008 Net Income 2009

Spearman's rho Overall FI Disclosure 2007 Correlation Coefficient 1.000 .459 .392 .629* .555 .466

Sig. (2-tailed) . .133 .207 .029 .061 .127

N 12 12 12 12 12 12

Overall FI Disclosure 2008 Correlation Coefficient .459 1.000 .948** .058 -.108 -.020

Sig. (2-tailed) .133 . .000 .858 .739 .952

N 12 12 12 12 12 12

Overall FI Disclosure 2009 Correlation Coefficient .392 .948** 1.000 .112 .011 .099

Sig. (2-tailed) .207 .000 . .728 .974 .760

N 12 12 12 12 12 12

Net Income 2007 Correlation Coefficient .629* .058 .112 1.000 .837** .648*

Sig. (2-tailed) .029 .858 .728 . .001 .023

N 12 12 12 12 12 12

Net Income 2008 Correlation Coefficient .555 -.108 .011 .837** 1.000 .861**

Sig. (2-tailed) .061 .739 .974 .001 . .000

N 12 12 12 12 12 12

Net Income 2009 Correlation Coefficient .466 -.020 .099 .648* .861** 1.000

Sig. (2-tailed) .127 .952 .760 .023 .000 .

N 12 12 12 12 12 12

*. Correlation is significant at the 0.05 level (2-tailed). **. Correlation is significant at the 0.01 level (2-tailed). Reporting of Impairment

Content analysis of the commercial banks annual reports shows that banks operating in Jordan were reluctant to recognize credit losses on loans (and other financial instruments). This is especially a weakness in existing accounting standards contrary to those envisaged in IFRS. This is consistent with reports that banks globally were slow in recognizing the credit losses on loans. It is on this backdrop that the IASB introduced a new, expected loss impairment framework for timely recognition of expected credit losses.

Hedge accounting

The overwhelming majority of the banks analyzed with the exception of just one did not conduct hedge accounting. This problem is widely acknowledged in literature on financial reporting during the global financial crisis of 2008 2009. Consequently, existing literature shows that this standard was the subject of IFRS 9 review that introduced a reformed framework for hedge accounting, with enhanced disclosures about activities related to risk management. As such, the new framework aligns the accounting treatment with activities related to risk management, enabling banks as well as other entities to better reflect these activities in their financial statements. In the present study, the hedge accounting was almost non-existent, so it is difficult to tell its individual contribution to the performance of banks operating in Jordan during the financial crisis.

Fair Value Accounting

A series of regression analysis were conducted to determine the performance of banks during the 2007 2009 period using fair value accounting in commercial banks operating in Jordan.

ANOVAbModel Sum of Squares dfMean Square F Sig.

1 Regression 1432.910 1 1432.910 1.437 .261a

Residual 8973.636 9 997.071 Total 10406.545 10 a. Predictors: (Constant), FAIR VALUE 2007 b. Dependent Variable: Net Income 2007 Table 4

Coefficients of regression analysis of the relationship between Fair Value reporting and bank performance in 2007

Model Unstandardized Coefficients Standardized Coefficients t Sig.

B Std. Error Beta 1 (Constant) 13.174 14.723 .895 .394

FAIR VALUE 2007 9.255 7.721 .371 1.199 .261

a. Dependent Variable: Net Income 2007 Table 4 shows the results of the regression for the year 2007. The analysis of variance (ANOVA) show that there is statistically insignificant association between Fair Value accounting and financial performance for that period (F (1, 9) = 1.437, p=.261).

Figure 1: Fair Value reporting among the 12 banks for the period 2007 2009.

Discussion of Results

Perusal through the annual reports of select banks in Jordan revealed that many banks did not provide comprehensive financial information in the 2007 2009 period as required by the accounting reporting standards. Quantitative and/ or qualitative disclosure of financial instruments and its voluntary delivery via formal or informal channels is an accounting standard required of contemporary companies (Gibbins et al., 1990). Previous researches on the financial disclosure are based on various factors such as the kind of voluntary disclosures that banks perform, the characteristics that influence financial disclosure as well as the role of mandatory disclosures on voluntary disclosure (Hassan and Marston, 2010). The International Accounting Standards (IAS) gives guidelines for the presentation of financial statements and sets minimum requirements of the financial instruments applicable to all financial statements based on the International Financial Reporting Standard (IFRS). The first comprehensive accounting standard to deal with the disclosure of financial information was the IAS 1 established in 1997 the International Accounting Standards Committee (IASC). Due to an increasing need for stakeholder information on the financial performance of corporations, companies have had the opportunity to increase their level of information disclosure. Consequently, the International Accounting Standards Board (IASB) issued the IFRS 7 in 2007 whose purpose was to harmonize all the corporate financial information disclosure. It is on the backdrop of these disclosure requirements that the present study sought to determine the level of financial instrument disclosure and its relationship to financial crisis in the Jordanian banking sector.

The cost of capital is an issue that has always bothered the banking sector and has been the subject of several previous studies. In addition, the financial information disclosure by the banking sector and indeed other sectors has become a common requirement for corporations listed on the stock markets, and there has...

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