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.
A recent report has suggested that European MEPs want more scrutiny of accounting standards issued by the International Accounting Standards Board (IASB) with an emphasis less complex rules, in addition to calling for scrutiny of whether standards allow tax fraud as well as improved governance of the IFRS Foundation, which governs the IASB.
Traditionally, the relationship between collections and impairment is one way under IAS39. Collections activity can influence the severity of the loss and in the best case, can return accounts to order. This impacts the impairment line in two ways, the amount recovered and the direct cost of collecting it.
Regulations that aim to increase understanding of risks for management, investors and the general public are effective, self-reinforcing and are likely to change emergent behaviour. Market wide stress testing initiatives have been particularly powerful in this regard – by requiring banks to consider explicitly the worst scenarios and publish the outcomes, the market has been driven to protect and plan for those events.
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.