Quantifying the sources of volatility in the IFRS 9 impairments

Stander, Yolanda S.

doi:10.1080/10291954.2021.1885242

Cited by 13 publications

(11 citation statements)

References 51 publications

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“…The goal of accounting is to provide decision-useful financial information to stakeholders (Dong & Oberson 2022). Proper application of IFRS 9's ECL model requires extensive management judgement to integrate forwardlooking information into the modelling process (Dong & Oberson 2022; Novotny-Farkas 2016) -necessitating quality disclosures in annual financial statements to reduce information asymmetry and decrease the risk of earnings management through ECL allowances (Stander 2021).…”

Section: The Accounting Treatment Of Expected Credit Losses Under The...mentioning

confidence: 99%

“…In times of economic uncertainty, such as COVID-19, estimating future credit defaults becomes more difficult as historical information has less predictive value, resulting in increased reliance on management's judgement regarding forwardlooking information. As such, proper application of the ECL model in IFRS 9 and adequate disclosure relating to the measurement of the ECL allowance are imperative in providing decision-useful financial information to users of annual financial statements and to reduce the risk of earnings management (Novotny-Farkas 2016;Stander 2021).…”

Section: Introductionmentioning

confidence: 99%

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The accounting treatment of expected credit losses by South African banks during COVID-19

Nkomombini

Oellrich²,

Kilbourn³

et al. 2023

J. econ. financ. sci.

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Reporting Standard 9 applies a forward-looking approach, meaning an allowance for credit losses is recognised based on expectations instead of actually incurred losses (Gubareva 2021;Stander 2021). International Financial Reporting Standard 9's expected credit loss (ECL) model is preferred as it could reduce the financial effects of procyclicality in banks (Pucci & Skaerbaek 2020), leading to greater financial stability (Novotny-Farkas 2016). Moreover, employing the ECL model and adhering to its disclosure requirements are expected to provide more decision-useful financial information, which is critical during periods of economic downturn (Novotny-Farkas 2016; Stander 2021). However, IFRS 9's possible benefits 'will crucially depend on its proper and consistent Orientation: The coronavirus disease 2019 (COVID-19) pandemic negatively affected borrowers' ability to repay debt, which is expected to influence banks' calculation of their expected credit loss (ECL) allowance. Comprehensive disclosure regarding the application of managerial judgement in calculating ECLs would produce decision-useful financial information.Research purpose: This study explored the effects of the COVID-19 pandemic on the measurement and disclosure of ECL allowances by South African listed banks.Motivation for the study: It is unknown whether decision-useful financial information regarding South African banks' ECLs was produced during the pandemic, mirroring developed countries.Research approach/design and method: Content analysis of quantitative and qualitative data from annual financial statements was employed for a sample of listed banks.Main findings: Banks employed a variety of relief measures to accommodate borrowers, but these relief measures did not automatically trigger a significant increase in credit risk. More loans were subject to lifetime ECLs, causing the ECL allowance to increase substantially during the first year of the pandemic. Forward-looking information as well as postmodel adjustments were employed to measure the ECL allowance.Practical/managerial implications: The ECL allowances of South African listed banks increased during the pandemic. Disclosure in the annual financial statements and identifying ECLs as a key audit matter provided evidence of adequate consideration of the credit risk and forward-looking information influencing ECLs by banks and their auditors. Improved disclosure regarding postmodel adjustments is required.Contribution/value-add: During the COVID-19 pandemic, decision-useful financial information regarding the calculation of banks' ECL allowances was available for South African banks, mirroring developed countries.

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Section: The Accounting Treatment Of Expected Credit Losses Under The...mentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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…”

mentioning

confidence: 99%

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The accounting treatment of expected credit losses by South African banks during COVID-19

Nkomombini

Oellrich²,

Kilbourn³

et al. 2023

J. econ. financ. sci.

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“…Correlation breaks and extreme market movements meant the economic scenarios generally did not adequately capture market events and had to be rapidly updated each time new events unfolded, incorporating significant expert judgement. Uncertainty in the economic outlook led to volatility in the IFRS 9 impairments, which has a negative impact on the earnings quality of banks (Stander 2021). Breakdowns in the relationship between economic variables and the credit quality of clients caused further complications.…”

Section: Literature Reviewmentioning

confidence: 99%

Investigation into the International Financial Reporting Standards 9 model flaws exposed during the pandemic

Stander¹

2023

J. econ. financ. sci.

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Orientation: Market events during the coronavirus disease 2019 (COVID-19) pandemic exposed flaws in the econometric models used to derive International Financial Reporting Standards (IFRS) 9 impairments. Models were unable to capture the level of government intervention or predict the economic recovery process because of the unprecedented nature of the pandemic.Research purpose: This study examines the causes of the challenges experienced with the IFRS 9 models during the pandemic and approaches to minimise this risk in the future.Motivation for the study: Structural correlation breaks forced banks to replace the IFRS 9 models with expert overlays or rapidly rebuild the models to reduce impairment volatility and manage the impact on earnings. Expert judgement may lead to biased outcomes.Research approach/design and method: Behavioural finance theory suggests that emotion and cognitive biases often lead to irrational investment decisions with disastrous consequences to the market. The link between market sentiment and economic outcomes is tested with natural language processing. Archimedean copulas are used to compare the dependence structures of market variables between different stress periods.Main findings: Market sentiment is closely related to the trends observed in major macroeconomic indicators. The nature of the dependence structures differs between stress periods.Practical/managerial implications: Sentiment may be a valuable exogenous variable to incorporate into economic forecast models. Learnings from one stress period are not necessarily applicable to another.Contribution/value-add: Government intervention and market sentiment had a significant impact on the economic outcomes and correlation breaks observed during the pandemic. Developing bespoke models for the different phases of the economic cycle may not necessarily lead to improved outcomes.

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“…contrast the features and consequences of the new model with the incurred credit loss, analyze the controversies with bank prudential institutions, information asymmetry and conservatism Cohen et al (2014). andMorris et al (2016) focus on bank earning management practices Stander (2021). elaborates on the impact of IASB (2019), IFRS 9 impairment volatility on earnings quality.…”

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confidence: 99%

IFRS 9 Single Impairment Model: Semantics and Circularity? A Study in the Airline Industry

Bellandi¹

2021

IJBM

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This paper studies a sample of airlines reporting under International Financial Reporting Standards (IFRS) about three specific challenges in implementing International Accounting Standards Board (IASB) (2019), IFRS 9 requirements for impairment versus IASB, 2014, IAS 39: 1) expected versus incurred credit losses; 2) impairment scoping and elective simplifications; and 3) definition and use of default. First, there appears to be a strong indicator that the way airline companies have drawn the line between what future conditions should or should not be considered in estimating expected versus incurred credit losses has maintained the fundamental tenet in IFRS of representing the condition existing as of the end of the reporting period. Second, evidence of companies quests for IASB (2019), IFRS 9 impairment simplifications attests to the criticism that the alleged single model of impairment is in effect a complex collection of different techniques. Finally, the degree of specific application that IASB (2019), IFRS 9 requires for the definition and use of default, as well as the customization of what triggers a significant change in the risk of default since initial recognition, does not appear to have been fully received, and sufficiently disclosed in the financial statements.

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Quantifying the sources of volatility in the IFRS 9 impairments

Cited by 13 publications

References 51 publications

The accounting treatment of expected credit losses by South African banks during COVID-19

The accounting treatment of expected credit losses by South African banks during COVID-19

Investigation into the International Financial Reporting Standards 9 model flaws exposed during the pandemic

IFRS 9 Single Impairment Model: Semantics and Circularity? A Study in the Airline Industry

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