IFRS9 Expected Credit Losses (ECL) are commonly calculated as the sum of the marginal future expected losses in each period following the reporting date, using PD, LGD and EAD components. ECL can also be calculated directly from expected future cash flows. This could be an attractive option for many short-term lenders, especially for those that cannot leverage existing PD, LGD and EAD models, as it requires developing a single cash flow model.
Right now, most organisations are well on their way to coming up with a compliant solution for IFRS 9. Management are starting to understand the direct impact to their P&L (profit and loss) although thought naturally moves to the other impacts of the implementation of this regulation.
Based on our experience, there are a number of aspects that are common to every IFRS 9 project – they include:The solution you thought you would arrive with at the start is not actually the solution you end up with IFRS 9 is a vastly complex challenge and whilst simplifications can be applied, they need to be relevant and justifiable for your organisation.
In response to the financial crisis of 2007-2008, the International Accounting Standards Board (IASB) is replacing the “incurred loss” model for loan provisioning (IAS39) with an “expected loss” model for loan provisioning (IFRS 9).
It’s something many have deliberated on and the speculation continues. We think this rather depends on how consistently and robustly the impending changes are implemented across the industry.