Testing the Efficacy of Replacing the Incurred Credit Loss Model with the Expected Credit Loss Model

Mohamed Gomaa, Kiridaran Kanagaretnam, Stuart Mestelman and Mohamed Shehata

European Accounting Review, 2019, vol. 28, issue 2, 309-334

Abstract: We use a controlled laboratory environment to provide evidence on the potential efficacy of the replacement of the Incurred Credit Loss (ICL) Model of International Accounting Standard (IAS 39) by the Expected Credit Loss (ECL) model of IFRS 9 to account for credit impairment losses. We focus on the simplified version of the ECL model using an uncertain production environment as the context. We induce incentives consistent with the existing rigid rule-based ICL model and the proposed forward-looking principle-based ECL model. Our primary finding is that the combined effects of eliminating the minimum ‘probable’ threshold condition together with allowing managers to incorporate forward-looking information increase both the amount and adequacy of periodic reserve decisions. In addition, we analyze the effects of increased flexibility under the new credit-loss model on earnings management using three different compensation schemes. We find that while the replacement of the ICL model with the ECL model facilitates higher reserves, the resulting increased earnings management varies across compensation schemes, is less than predicted, and does not offset the potential of the ECL model’s positive effects. The results provide ex ante evidence on the likely intended and unintended consequences of implementing the ECL model.

Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://hdl.handle.net/10.1080/09638180.2018.1449660 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:euract:v:28:y:2019:i:2:p:309-334

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/REAR20

DOI: 10.1080/09638180.2018.1449660

Access Statistics for this article

European Accounting Review is currently edited by Laurence van Lent

More articles in European Accounting Review from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().