Credit Impairment in IFRS 9: Challenges and Solutions

Context

The “old” accounting standard IAS 39 (introduced in 2005) has proved fragile in the face of the great financial crisis of 2007-2009. The idea that future profit margins would be enough to cover the intrinsic risk of “healthy” credit exposures, unless an unexpected, traumatic event were to occur (“incurred loss”), has left its mark on the banks’ balance sheets, a “cliff effect” that has led to highly procyclical shifts, that were not adequately covered through early provisions.

As regards credit exposures, the new IFRS 9 represents a breakthrough, in an attempt to deal with the banks’ loan books in more balanced and insightful way. On the one hand, prudential provisioning is now required even for fully performing loans, albeit limited to the coverage of default risk only for the subsequent year. On the other hand, an intermediate level between performing and non-performing loans has been introduced, to account for those exposures that, although not still in a full-blown distress, show a marked increase in risk compared to initial conditions (meaning that the spread originally agreed with the debtor is no longer enough to offset future expected losses). A more realistic system is, inevitably, a more complex system.

Index of the Paper

  • The new impairment model
  • A preview of the main impacts
  • Recognizing risk: first time adoption and transfer criteria
  • Measuring lifetime expected loss
  • Forward looking assessments
  • How IFRS 9 will affect processes
  • A possible work plan