Implementing Both IFRS 9 and CECL

Jimmy Yang, Kenneth Chen

INTRODUCTION

Purpose

This chapter outlines the impairment framework and various approach for modelling expected credit loss (ECL), in order to meet the International Financial Reporting Standard 9 (IFRS 9) and US GAAP current expected credit loss (CECL) requirements. Financial institutions with international exposures within and outside of the US must comply with both standards (ie, US-based financial institutions with non-US booking legal entities and non-US-based financial institutions with US booking legal entities). For each key component of the IFRS 9 and CECL framework, we present a summary of the requirements and a high-level comparison of both methodologies.

The concept and estimation of ECL, which comprises probability of default (PD), loss-given default (LGD), exposure at default (EAD), prepayment11 Compared with other credit metrics, prepayment is less researched for wholesale portfolios. However, under IFRS 9 and CECL, incorporating the impact of prepayment into the ECL estimation is one of the considerations. and the discount rate using the effective interest rate (EIR), are well recognised in the regulatory environment for the purposes of estimating future

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