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2023 | OriginalPaper | Buchkapitel

2. IFRS 9 and the Expected Credit Loss Model

verfasst von : Merjona Lamaj

Erschienen in: The Effect of Covid-19 on Loan Loss Provisions and Earnings Management of European Banks

Verlag: Springer Fachmedien Wiesbaden

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Abstract

This chapter aims to describe the key requirements of IFRS 9 on accounting for loan loss provisions. First, it describes the main rationale behind credit loss provisioning. It proceeds by giving a short history of the standard development and finally, the last section summarizes the main implications of the ECL-model on banks’ loan loss provisioning practices.

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Vorheriges Kapitel Introduction

Nächstes Kapitel Covid-19 and European Banks

According to IAS 39, “credit losses are recognized only if there is an objective evidence of impairment as a result of a loss event that occurred after the initial recognition of the financial asset and the effect of that loss event on the future cash flows can be reliably estimated ”.

FCAG was created in October 2008 as part of the joint approach of IASB and the US-based standard setter, the Financial Accounting Standard Board (FASB), in order to deal with financial reporting issues arising from the financial crisis.

IFRS 9.5.5.10 stipulates that while assessing a significant increase in credit risk “an entity shall consider reasonable and supportable information, that is available without undue cost or effort”.

Furthermore, loan commitments and financial guarantee contracts, previously under the scope of IAS 37 Provisions, Contingent Liabilities and Contingent Assets, are now under the scope of IFRS 9.

EIR is the rate that discounts all future payments considering all contractual terms of the financial instrument but not including the expected credit losses (IFRS 9, Appendix A).

The standard includes a non-inclusive list of events that may lead a financial asset to be credit impaired. This includes significant financial difficulties of the borrower or a breach of contract, such as default or past due events.

Point-in-time PDs fluctuate more than through-the-cycle PDs. Moreover, through-the-cycle PDs tend to overstate point-in-times PDs during good times and understate them during downturns (Novotny-Farkas, 2016).

This is also one of the main reasons why, following the global financial crisis, the Financial Stability Forum (FSF) asked the International Accounting Standard Board (IASB) to encourage the use of judgment and flexibility embedded in the standard.

Titel: IFRS 9 and the Expected Credit Loss Model
verfasst von: Merjona Lamaj
Verlag: Springer Fachmedien Wiesbaden
Buch: The Effect of Covid-19 on Loan Loss Provisions and Earnings Management of European Banks
Print ISBN: 978-3-658-40059-0

Electronic ISBN: 978-3-658-40060-6

Copyright-Jahr: 2023
DOI: https://doi.org/10.1007/978-3-658-40060-6_2