The New Impairment Model Under IFRS 9 and CECL
First published:
ISBN: 978-1-78272-347-9
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The New Impairment Model: Audit and Disclosure Challenges
Yvonne Chan
Introduction
The New Era of Expected Credit Loss Provisioning
The Marking of CECL Standard: Comments and Reflections
Sources of Modelling Variation in CECL Allowances
A CRO’s Perspective: Implementing, Operationalising and Governing of IFRS 9
Implementing Both IFRS 9 and CECL
Macroeconomic Forecasting and Scenario Design for IFRS 9 and CECL
Technology Solutions for CECL and IFRS 9
Implementing IFRS 9: Quantifying Expected Credit Losses in Retail and Wholesale Portfolios
From Incurred Loss to CECL: Historical Perspectives and Practical Guidance
Loss Forecasting Retail and Commercial Portfolios for CECL
Implementing CECL at Small and Community Banks
The New Impairment Model: Audit and Disclosure Challenges
The New Impairment Model: Governance and Validation
The Impacts of CECL: Empirical Assessments and Implications
How the New Impairment Model Could Affect Banks’ Business Models
Measuring and Managing the Impact of New Impairment Models on Dynamics in Allowance, Earnings and Bank Capital
Integration into Regulatory Capital Frameworks
Implications for Equity and Debt Investors
This chapter discusses the audit and disclosure challenges facing entities that are applying either International Financial Reporting Standard 9’s (IFRS 9’s) expected credit loss (ECL) model or the Financial Accounting Standards Board’s (FASB’s) current expected credit loss (CECL) model to measure loan11 These impairment models generally apply to many forms of lending, including loans, trade receivables and debt securities. For the purposes of this chapter, reference is made only to loans, but applies equally to the other forms of lending. impairments for the first time. Although the chapter focuses on the challenges in the first year, many of these challenges will continue to be faced in the years to follow. The chapter provides background on the audit process, highlighting the procedures necessary to audit the estimate of the ECL or CECL models. Lastly, the chapter will discuss the challenges surrounding the disclosures prescribed by the IASB and/or FASB.
AUDITING THE NEW IMPAIRMENT MODEL
Both the ECL and CECL calculations are complex estimates, requiring the use of significant management judgement, and involve estimation uncertainty. The calculations involve extensive use of
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