IFRS 9’s expected credit loss – The good side of it

IFRS 9 is seen to be a challenging or difficult standard to implement for many businesses, especially when it comes to its expected credit loss (ECL) model.

Measuring ECL can be judgemental. A sophisticated model like those adopted by the banks can help accountants make a better judgement. However, it comes at a cost.

Many businesses are questioning the value of such demanding requirements. Many think that it is more relevant to the banking industry. Banks have more receivables than other types of assets. Credit losses on their receivables would have a greater impact on the entities’ going concern compare to other industry. It is therefore not surprising that the banking industry is much more prepared for this ECL requirement than the other industries.

Many people complain about it. But what are the benefits that IFRS 9 brings?

Bring your ops and accounting teams closer

One of the things that managers want to see is teams working in silo. We think that IFRS 9’s expected credit loss (ECL) model is helping organisations to bring the operations team and accounting team to work closer together.

Under IAS 39, the old standard, receivables are impaired when credit loss is incurred. That usually happens sometime after the sale is concluded. On the other hand, the ECL model requires a continuing assessment of customers risk of default, starting from day one of receivable recognition. With the requirement, we expect the input to the ECL computation to come from both operation and accounting teams.

Operations team, who is closer to the market, speaks with customers and suppliers on a daily basis. They are the best source for forward-looking information. On the other hand, the accounting team has historical default data.

As IFRS 9 requires consideration of both historical and forward-looking information, both teams need to work together to get things done.

The benefits from this? Let’s discuss the obvious one later. The side effects from this: It will help both teams to understand each other better, improve communication.

The obvious one

Accounting team would need to analyse historical default data on a regular basis. That analysis could help the operations team makes better decisions at the frontline.

Giving you an example. From the historical data, the accountants noted that 20% of sales made to country A became uncollectible. This is a valuable piece of information, not only for financial reporting purposes but also for decision-making purpose. It is worthwhile to sell to country A? Should we increase the margin?

With the right data and correct analysis, you might be able to refine the default rate analysis, e.g. segmentation by other characteristics.

More than a financial reporting requirement

Many businesses that we spoke to see the ECL model as a financial reporting requirement. It can be more useful than that.

Now that the teams know country A has a particularly high default rate. Every dollar of sales going to country A will be slapped with a 20% ECL allowance. It affects performance measure.

The management would then want to incorporate the ECL matrix that the accounting team has developed into the credit assessment process. This is the real value of IFRS 9’s ECL model.


For the ECL model to achieve these benefits, the entities need the following ingredients: right data and correct analysis. Without a meaningful analysis of historical and forward-looking data, the opposite could happen.

How can we help?

We help businesses to develop analytic models for historical default data. These models transform the entity’s historical credit loss experience into a provision matrix. Provision matrix is a commonly used practical expedient allowed by IFRS 9 to measure ECL (IFRS9.B5.5.35).

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