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The Procyclicality of Impairment Accounting: Comparing Expected Losses Under IFRS 9 and US GAAP

The Procyclicality of Impairment Accounting: Comparing Expected Losses Under IFRS 9 and US GAAP In this paper, we aim to compare the cyclical behavior of credit impairments in the P&L account under three accounting regimes: IAS 39, IFRS 9, and US GAAP with the CECL update. Our results show that although IFRS 9 is less procyclical than IAS 39, it remains more procyclical than CECL. The difference comes from accounting for the expected loss in one year in the case of IFRS 9, while CECL accounts for expected losses over their lifetime. This accounting comes at the cost of a large increase in provisions that occur primarily during longer contractionary phases. However, the length and shape of the cycle matter more under IFRS 9. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Services Research Springer Journals

The Procyclicality of Impairment Accounting: Comparing Expected Losses Under IFRS 9 and US GAAP

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References (24)

Publisher
Springer Journals
Copyright
Copyright © European Central Bank, under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature 2023. Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.
ISSN
0920-8550
eISSN
1573-0735
DOI
10.1007/s10693-022-00392-1
Publisher site
See Article on Publisher Site

Abstract

In this paper, we aim to compare the cyclical behavior of credit impairments in the P&L account under three accounting regimes: IAS 39, IFRS 9, and US GAAP with the CECL update. Our results show that although IFRS 9 is less procyclical than IAS 39, it remains more procyclical than CECL. The difference comes from accounting for the expected loss in one year in the case of IFRS 9, while CECL accounts for expected losses over their lifetime. This accounting comes at the cost of a large increase in provisions that occur primarily during longer contractionary phases. However, the length and shape of the cycle matter more under IFRS 9.

Journal

Journal of Financial Services ResearchSpringer Journals

Published: Dec 1, 2023

Keywords: Banking system; Provisions; Loan losses; Procyclicality

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