Implementing IFRS 9: Evidence from Financial Institution Preparers on Expected Credit Loss Reporting

SYNOPSIS

Despite emerging research on the adoption and effects of the expected credit loss (ECL) approach introduced by IFRS 9, its operational realities remain largely unexamined. Drawing on evidence from semistructured interviews with senior financial reporting and risk professionals, we examine how preparers implement the approach. We find that preparers design ECL models that are closely aligned with their internal risk management. A forward-looking approach is operationalized through the development of a range of probability-weighted future scenarios. ECL models are highly customized, and one of the key challenges is the need for continuous monitoring. Overall, we find that preparers appreciate the flexibility provided by the ECL approach but also recognize that its implementation entails managerial judgment variability and introduces potential model risk. Our findings should interest auditors, users, and academics interested in the decision-making processes underlying reported numbers as well as standard setters as they consider whether to provide additional guidance.