Introduction

Jing Zhang

Reserving for credit loss is one of the most critical aspects of a financial institution’s accounting practice. Its objective is to cover incoming losses on impaired financial instruments due to defaults and nonpayment. Reserve measurement affects both the balance sheet and income statement. It impacts on earnings, capital, dividends and bonuses, and it attracts the attention of stakeholders ranging from the board of directors and regulators to equity investors. In response to the so-called “too little, too late” problem experienced with loss reserve during the Great Financial Crisis, accounting-standard setters – the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) – now require financial institutions’ provision against credit loss based on expected credit loss (ECL). Arguably, calculating ECL estimates under the International Financial Reporting Standards (IFRS 9) and the FASB’s current expected credit loss (CECL) model presents a momentous change, with the new standards coming into effect sometime between 2018 and 2021, depending on the jurisdiction.

The new impairment models replace existing “incurred-loss models” with more f

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