The Procyclicality of Impairment Accounting: Comparing Expected Losses Under IFRS 9 and US GAAP

Alejandro Buesa, Javier Población () and Javier Tarancón ()
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Javier Población: Banco de España
Javier Tarancón: Banco de España

Journal of Financial Services Research, 2023, vol. 64, issue 3, No 1, 303-324

Abstract: Abstract In this paper, we aim to compare the cyclical behavior of credit impairments in the P&L account under three accounting regimes: IAS 39, IFRS 9, and US GAAP with the CECL update. Our results show that although IFRS 9 is less procyclical than IAS 39, it remains more procyclical than CECL. The difference comes from accounting for the expected loss in one year in the case of IFRS 9, while CECL accounts for expected losses over their lifetime. This accounting comes at the cost of a large increase in provisions that occur primarily during longer contractionary phases. However, the length and shape of the cycle matter more under IFRS 9.

Keywords: Banking system; Provisions; Loan losses; Procyclicality (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10693-022-00392-1

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