The impact of the IFRS 9 expected loss approach on accounting conservatism

• Main Authors: GOH, Clarence, LIM, Chu Yeong, OW Yong, Kevin
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2021
• Subjects: IFRS 9; expected loss model; loan loss provisions; accounting conservatism; Accounting; Corporate Finance
• Online Access: https://ink.library.smu.edu.sg/soa_research/1941; https://ink.library.smu.edu.sg/context/soa_research/article/2968/viewcontent/GohLimYong2021_pvoa.pdf
• Institution: Singapore Management University

Using an experimental setting, this paper examines the impact of the International Financial Reporting Standard (IFRS 9) expected credit loss (ECL) approach on accounting conservatism. The ECL approach enables banks to incorporate loan loss provisions (LLP) on a timelier basis and help bank regulators anticipate weaknesses in banks’ loan portfolios. Conversely, the ECL model could be more susceptible to managerial discretion. More conservative bank managers might make excessivecredit provisions. Our findings show that high conservatism is positively associated with higher levels of LLP. In addition, the effect of accounting conservatism is contingent upon the type of loan loss model. We find evidence suggesting that when the ECL model is used, high conserv atism leads to higher provisions. In contrast, when the incurred loan loss (ILL) model is used, accounting conservatism does not seem to impact the magnitude of LLP. Overall, our study provides insights on ramifications in IFRS 9 implementation.