4 Factors to Consider When Implementing IFRS 9’s Expected Loss Model


In 2014, the International Accounting Standards Board—the organization behind the International Financial Reporting Standards (IFRS)—launched IFRS 9, a replacement of IAS 39. This standard provided new guidelines for banks, as well as companies listed in the public stock exchange, pertaining to the classification and measurement of financial assets and liabilities. Among the most significant changes introduced by IFRS 9 were impairment requirements for a bank’s expected credit losses. IFRS 9 compelled banks to follow a certain set of impairment calculations when determining the expected losses in their books.

Though the goal was to make IFRS 9 a mandatory financial reporting standard for banks in 2018, it’s no secret that some financial institutions are undergoing difficulties in their compliance. This is especially true of small to mid-sized banks, whose compliance infrastructure isn’t as well-equipped to go through the process as the infrastructure of their bigger counterparts. Many small banks do want to stay faithful to IFRS 9 and thus achieve full financial transparency over the value of their assets and liabilities. But the current state of their bookkeeping, reporting, and data processing systems is in the way.

If your own institution still has a hard time understanding the full demands of IFRS 9—let alone implementing its expected loss model—what can you do to bridge the existing knowledge, ability, and technology gaps? You can start by considering these four factors and determining the right action to take on the part of your bank’s compliance team.


Your Means of Complying with IFRS 9

The first thing that you should consider is how ready your bank’s current tech infrastructure is to handle the demands of IFRS 9. Will your tech stack be conducive in accurately classifying your financial instruments according to IFRS 9’s system? Will it help you sort all your accounts according to IFRS 9’s three stages of impairment in a quick and accurate manner?

If you consider IFRS 9 compliance a priority for your bank, but you’re not sure how accommodating your current tech stack is, consider onboarding an IFRS 9 application. This upgrade will make implementation of IFRS 9’s expected loss model much less tedious, and it will allow you and your compliance team to see the full picture of your compliance journey.


Your Method of Calculating Provisions

Though onboarding an IFRS 9 solution will increase your readiness to fulfill the standard, it won’t do all the homework for you. You and your compliance team will still need to learn how to calculate provisions like effective interest rate (EIR) and effective interest spread (EIS) according to the IFRS 9 guidelines.

The first step is to learn how to compute credit parameters and cash flow using IFRS 9’s methods, then to get proficient at your calculations. Your next step is to grow more comfortable handling large swathes of complex data, pertaining to fields like estimates on forward-balances and the discontinued value of expected cash flows. Once you and your compliance team know the level of mastery you need to achieve, IFRS 9 compliance will feel like a matter of course.


The Macroeconomic Situation Using a Point-in-Time Basis

The third consideration you should make is your bank’s outlook given current macroeconomic situations. All the decisions that you make when classifying your assets into IFRS 9’s stages depend on the forward-looking macroeconomic information you have. For sure, it will no longer be enough for your bank to calculate provisions only when there is realized impairment, say for example when a client has already missed a payment. Though this may have been the default approach when IAS 39 was still in place, it will be a different scenario when adjusting to IFRS 9.

If your compliance efforts are still based on realized impairment, take this chance to be more forward-looking and to calculate provisions as if loans could default as soon as they are originated. Be aware of point-in-time macroeconomic factors that could affect both your 12-month expected credit losses and lifetime expected credit losses. As a result of adopting IFRS 9’s forwarding-looking macroeconomic approach, you will likely end up making assessments on your bank’s assets and liabilities that are more grounded in reality.


Your Bank’s Current Risk Modeling Approaches

One last consideration you should make pertains to your bank’s current risk modeling methodologies. Compliance with IFRS 9 requires a thorough understanding of credit risk characteristics, as well as an even more granular approach to calculating risk.

Does your compliance team still subscribe to top-down or rules-based risk modeling? If they do, now’s a good time to adopt the risk-sensitive attitude that is inherent to IFRS 9. Rethinking your current risk modeling approaches will prepare all of you to make the granular-level computations that are essential to IFRS 9 implementation.



In truth, it will not be an easy ride to full IFRS 9 compliance. But the byproducts of fulfilling the standard—like full financial transparency, risk-sensitiveness, and computations at the granular level—could ultimately spell good things for your bank. It will be a good decision for you to prioritize compliance and to oversee a successful implementation of the IFRS 9 expected loss model. Start addressing the knowledge, ability, and tech gaps now and strengthen your systems for IFRS 9 compliance.