Financial Services Ireland

IFRS 9 expected credit loss: making sense of the transition impact

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IFRS 9 expected credit loss: making sense of the transition impact

For banks reporting under International Financial Reporting Standards (IFRS), January 1st marked the transition to the IFRS 9 expected credit loss (ECL) model. This represented a new, and often challenging, era for impairment allowances.

Our comparative analysis of the move from IAS 39 to IFRS 9 looks at the impact in allowances and coverage ratios for (i) total loans, (ii) credit-impaired loans and (iii) the ‘good’ book, as well as changes in Core Equity Tier 1 ratios.

Significant differences in transition impacts appear between banks – even between banks in the same market. Beyond financial statement impact, the analysis highlights the main factors that explain these differences. Some of these are typical drivers of changes in provisions, while others are related to the ECL approach.

In addition to these drivers, reclassifications, write-off policies and the treatment of purchased and originated credit-impaired (POCI) loans significantly affect comparability. We expect banks will continue to enhance the transparency of ECL disclosures and educate stakeholders on these aspects in the next reporting cycles.

This publication complements our series of IFRS 9 Impairment surveys (read our 2018 survey). Beyond the change in numbers, it discusses the main factors that explain differences between banks and countries.

The analysis was conducted on a sample of large banks representing Europe, the UK and Canada. Although presented on an anonymous basis, it is entirely based on publicly available information, such as 2017 annual reports, IFRS 9 transition reports and Q1 2018 quarterly reports.

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Martina Keane

Head of Assurance & IFRS 9 Solution Leader
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