Expected Credit Losses under IFRS 9: Concept, Models, and Disclosures

The IFRS 9 on Financial Instruments has made an important contribution to the credit loss recognition process and financial reporting by replacing the existing Incurred Credit Loss (ICL) model with the Expected Credit Losses (ECL) model. The ECL model applies to all financial instruments whether they are recognized at the amortized cost or at fair value. Firms are required to estimate and recognize loan loss allowances based either on the 12-month or lifetime ECL, depending on whether there has been a significant increase in the credit risk since initial recognition. In this chapter, we first briefly explain the scope of IFRS 9 and then discuss the main characteristics of ECL model and also present mathematical models that can be used to estimate credit loan losses. The mathematical models can be based either on the capital market, discounted cash flow, or weighted losses approach. Finally, we discuss ECL disclosures that are expected to provide greater transparency on credit risk and loan loss provisions, and also present economic implications of the ECL model on firm performance.