Basel Committee issues draft guidance on accounting for expected credit losses

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03 Feb 2015

The Basel Committee on Banking Supervision has issued draft guidance on accounting for expected credit losses. Comprising 11 fundamental principles, the guidance sets out supervisory expectations for banks relating to sound credit risk practices associated with implementing and applying an expected credit loss (ECL) accounting framework.

The scope of the guidance is accounting for expected credit losses broadly, so it is intended to cover IFRS 9 Financial Instruments as well as all other accounting frameworks (including impending changes to US GAAP).

The guidance is structured around 11 principles:

  • A bank's board of directors and senior management are responsible for ensuring appropriate credit risk practices.
  • A bank should adopt, document and adhere to methodologies that allow for appropriately assessing and measuring the level of credit risk on all lending exposures.
  • A bank should have a process in place to appropriately group lending exposures on the basis of shared credit risk characteristics.
  • A bank's aggregate amount of allowances should be adequate and consistent with the objectives of the relevant accounting requirements.
  • A bank should have policies and procedures in place to appropriately validate its internal credit risk assessment models.
  • A bank's use of experienced credit judgment is essential to the assessment and measurement of expected credit losses.
  • A bank should have a sound credit risk assessment and measurement process that provides it with a strong basis for assessing and pricing credit risk, and accounting for expected credit losses.
  • A bank's public reporting should promote transparency and comparability by providing timely, relevant and decision-useful information.
  • Banking supervisors should periodically evaluate the effectiveness of a bank's credit risk practices.
  • Banking supervisors should be satisfied that the methods employed by a bank to determine allowances produce a robust measurement of expected credit losses under the applicable accounting framework.
  • Banking supervisors should consider a bank's credit risk practices when assessing a bank's capital adequacy.

The guidance also includes an appendix specifically dealing with IFRS 9. The appendix provides guidance on certain aspects of the ECL requirements in the impairment sections of IFRS 9 that are not common to other ECL accounting frameworks and covers (i) the loss allowance at an amount equal to 12-month ECL, (ii) the assessment of significant increases in credit risk, and (iii) the use of practical expedients.

The Basel Committee stresses that the guidance is intended to set forth supervisory requirements on accounting for expected credit losses that do not contradict applicable accounting standards established by standard-setters. The IASB had prior access to the guidance and has not identified any aspects of it that would prevent a bank from meeting the impairment requirements of IFRS 9.

Please click for access to the draft guidance and a corresponding press release on the website of the Bank for International Settlements (BIS). Comments on the draft guidance close on 30 April 2015.

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