IFRS 9 versus CECL

IFRS 9 ECL versus CECL

The key differences between the two accounting frameworks

Aspect	IFRS 9 ECL	CECL	Implications
Standards Board	IASB	FASB
Approach to Loss Allowance	Three-stage approach: lifetime expected credit losses recognized only where credit risk has increased significantly since initial recognition	Two-stage approach: recognizes lifetime expected credit losses upfront for all loans
Relevant Time Horizons	Dual credit-loss measurement approach where the loss allowance is measured at an amount equal to either the 12-month expected credit losses for those financial assets classified in stage 1 or the lifetime expected credit losses for those classified in stages 2 (financial assets with a “significant increase in credit risk”) and 3 (“impaired financial assets”)	Lifetime expected credit losses for financial assets in its scope since the inception of the loan	The main difference between the two approaches affects those financial assets which have not experienced a significant increase in credit risk and are classified under Stage 1 in the ECL approach
Scope	Financial assets at fair value through other comprehensive income (FVOCI), typically debt securities previously classified as available-for-sale under IAS 39 are also subject to the ECL approach	Excluded from the CECL approach, unless they have experienced a decline in fair value below their amortised cost which is due to the credit risk. In that case, an impairment charge relating to credit losses must be recognised through an allowance for an amount limited to the (negative) difference between the fair value and the amortised cost of that instrument
Treatment of Loan Commitments	An entity should measure expected credit losses over the period that the entity is exposed to credit risk, and to the extent that expected credit losses are not mitigated by credit risk management actions such as the reduction or removal of undrawn limits.	The recognition of an allowance for expected credit losses beyond the point at which a loan commitment may be unconditionally cancelled by the issuer is not allowed, irrespective of whether the entity has ever exercised its cancellation right or not	Under IFRS 9, for financial assets that contain both a loan and an undrawn commitment component such as revolving credit facilities, the period over which expected credit losses are measured can extend beyond the maximum contractual period under ECL
Accrual of interest income	For loans classified as stage 3 (credit-impaired), the interest rate must take into account the expected credit loss (i.e. must be applied to the amount of the loan net of provisions, as opposed to stage 1 and 2 where the interest rate is applied to the gross amount of the loan)	The existing interest income recognition method for loans is on a gross basis and non-accrual practices are allowed. Indeed, in the US banking prudential framework, loans which are past due more than 90 days are not allowed to accrue any interest income
Troubled borrowers	The concept of a troubled debt restructuring does not exist in IFRS 9. Therefore, in these cases banks must assess whether the renegotiation can lead to the derecognition of the original financial asset and the recognition of a new asset, depending on the nature of the changes to the original contractual terms.	A concession provided to a troubled borrower is treated as a continuation of the original lending agreement. In this case, the reporting entity should reflect certain concessions (such as interest rate concessions) in its CECL estimate. Besides, the period over which credit losses are estimated should consider extensions associated with reasonably expected troubled debt restructurings.
Purchased credit impaired assets	An entity must recognise the cumulative changes in lifetime expected credit losses since initial recognition as a loss allowance. Impairment gains are recognised as a direct adjustment to the gross carrying amount.	The amortised cost at acquisition (i.e. purchase price) of these financial assets and the allowance for loan losses should be increased by the amount of lifetime expected credit losses at acquisition.
Collective evaluation	The ECL allows, but does not require, collective evaluation of credit losses when similar characteristics exist. However, when no reasonable information on individual basis is available, collective evaluation is mandatory.	CECL requires collective evaluation of credit losses when similar risk characteristics exist.
Time Value of Money	To calculate expected credit losses, cash flows are discounted using the effective interest rate determined at initial recognition. The time value of money is then explicitly reflected in these calculations.	Several methods are accepted for the calculation of expected credit losses, discounted cash flows being one of them. Other accepted methods (such as loss-rate methods, roll-rate methods, or probability-of-default methods) implicitly consider the time value of money.
Forward-looking Information	Reporting entities should consider reasonable and supportable information, including forward-looking information, in their impairment assessments. IFRS 9 requires evaluating a range of possible outcomes when determining an unbiased and probability-weighted amount for impairment charges.	It is explicitly allowed to revert to historical loss information for periods where the reporting entity is unable to develop reasonable and supportable forecasts. The use of the most likely scenario in the computation of impairment charges is accepted.

---