Expected credit loss approaches in Europe and the United States: differences from a financial stability perspective

ECB
By January 16, 2019 14:40

Expected credit loss approaches in Europe and the United States: differences from a financial stability perspective

In the aftermath of the global financial crisis, the leaders of the G20 urged accounting standard setters to reconsider the incurred loss model by analysing alternative approaches to recognising and measuring loan losses that incorporate a broader range of available credit information. In response to that request, accounting standard setters began developing expected credit loss (ECL) models which take account of a broad set of credit and macroeconomic information and have a more forward-looking nature. As a result of that work, the International Accounting Standards Board (IASB) issued International Financial Reporting Standard 9 (IFRS 9) in July 2014, which introduces an ECL approach, while the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) 326, which introduces the current expected credit loss (CECL) approach, in June 2016. The ECL and CECL approaches1 differ in several respects. The main difference is the fact that while the CECL approach mandates the calculation of lifetime expected credit losses for all financial assets under its scope since their inception, the ECL approach in IFRS 9 introduces a dual credit loss measurement approach whereby the loss allowance is measured at an amount equal to either the 12-month expected credit losses2 for those financial assets classified in stage 1 or the lifetime expected credit losses for those assets classified in stages 2 (financial assets with a “significant increase in credit risk”) and 3 (“impaired financial assets”). Among the many other differences, it is worth referring to the consideration of financial assets at fair value through other comprehensive income (excluded in CECL) and to the treatment of loan commitments (more prudent in ECL).

ECB
By January 16, 2019 14:40

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