IFRS 9, which will replace IAS 39 for the accounting periods beginning on or after 1 January 2018, requires the measurement of impairment loss allowances to be based on an expected credit losses (ECL) accounting model, rather than on an incurred loss accounting model. The EBA welcomes to an ECL model, which should result in the earlier recognition of credit losses. However, the application of IFRS 9 also requires the use of judgement in the ECL assessment and measurement process, which could potentially affect the consistent application of IFRS 9 across institutions.
In this context, the BCBS issued in December 2015 supervisory guidance on credit risk and accounting for expected credit losses, setting out supervisory expectations for credit institutions related to sound credit risk practices associated with implementing and applying an ECL accounting.
Following the consultation launched in July 2016, and building on the BCBS guidance, the EBA has published Final Guidelines (GL) on credit institution’s credit risk management practices and accounting for ECL, with the aim of harmonizing the criteria established by the BCBS and ensuring consistent interpretations and practices according to IFRS 9.
- It is not the objective of these GL to contradict the accounting requirements of IFRS 9, although they may have the effect of restricting the flexibility that IFRS 9 allows.
- These GL would not prevent a credit institution from meeting the impairment requirements of IFRS 9 and the BCBS guidance. Rather, these guidelines should be read as the supervisory approach to support the appropriate application of those standards.
The technical note prepared by Management Solutions’ R&D department includes an analysis of the main content of this document. Moreover, Annex 1 contains a list of the main changes introduced by the Final Guidelines when compared to the consultative document.
These GL are divided into four main sections: i) general considerations; ii) 8 principles addressed to credit institutions; iii) guidance specifically addressed to credit institutions applying IFRS 9; and iv) 3 principles for supervisors.
Scope of application
These GL are applicable to credit institutions (although one section is addressed to only those using IFRS, and other section is addressed to competent authorities), in relation to their lending exposures.
- General considerations on principles of proportionality, symmetry and materiality; and on the use of information.
- 8 principles for all credit institutions relating to the provisions for the main elements of credit risk management and accounting for ECL: i) management body and senior management; ii) sound ECL methodologies; iii) credit risk rating process and grouping; iv) adequacy of the allowance; v) ECL model validation; vi) experienced credit judgement; vii) common processes, systems and data; viii) and disclosure.
- Guidance specific for credit institutions applying IFRS 9: loss allowance of 12-month ECL, assessment of significant increases in credit risk and use of practical expedients.
- 3 principles specifically addressed to competent authorities: i) credit risk management, ii) ECL measurement, and iii) overall capital adequacy.
Download the technical note by clicking here.