How to deal with the Credit loss model under IFRS 9
18th Jun 2020
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The introduction of IFRS 9 had been pre-empted for several years but after the last financial crisis, was accelerated due to concerns that financial institutions were too slow to recognise loan losses.
Unquestionably, IFRS 9 created some of the biggest challenges for financial institutions; also had an impact on many other sectors – especially due to bad debt provisioning changes.
The most challenging change from the IFRS 9 reporting was the introduction of a new expected credit loss model (ECL), which replaced the incurred loss model of IAS 39.
Unlike previous years when only impairments that already had incurred were accounted for, the change means that companies need to take into account future impairments too.
IFRS 9 implemented two approaches to the ECL model.
The first involving a three-stage process to determine the amount of ECL to recognise, the second being a more simplified process but does still require the calculation of lifetime ECL from the start and could potentially involve accounting for a greater expected loss.
Entities weren’t just challenged with these changes to ECL under the IFRS 9 however.
How companies were required to classify and measure financial assets was also altered, splitting them down into three categories:
Fair value through other comprehensive income
Fair value through profit or loss
IFRS 9 posed another significant challenge, companies had to start assessing creditors in ways they hadn’t before, meaning they would be required to compile data that may not be easily accessible.
This was particularly problematic as the lack of easy access data meant companies who still relied on manual processes, or who used antiquated systems that involved the use of Word or Excel to compile accounts – were never built to withstand complex equations.
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