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The Emergence of the 'Incurred-Loss' Model for Credit Losses in IAS 39

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  • Kees Camfferman

Abstract

Following the financial crisis, the view became widespread that International Financial Reporting Standards (IFRS), because it is based on a so-called incurred-loss approach, led to significant overstatements of financial assets by placing tight restrictions on the recognition of loan losses. As a result, the International Accounting Standards Board (IASB) undertook a project to introduce an alternative expected-loss model in its standards, which would allow earlier recognition of loan losses. This paper is a historical study of the introduction of the incurred-loss model in International Accounting Standard (IAS) 39 between 1998 and 2003. With respect to the topic of loan losses, it argues that, especially at the beginning of that period, it was not yet common to view the issue in terms of a clear-cut dichotomy of incurred-loss versus expected-loss models, and that this had a significant complicating influence on the course of the debate. More generally, the paper illustrates some of the pressures on the quality of the Board's due process during its early years, when it attempted to complete an ambitious agenda in time for the first mass adoption of IFRS in 2005. While this paper takes no position on the correctness of the IASB's decisions as embodied in IAS 39 (2003), it does suggest that the episode covered provides justification for the considerable enhancements of its due process effected by the IASB over recent years.

Suggested Citation

  • Kees Camfferman, 2015. "The Emergence of the 'Incurred-Loss' Model for Credit Losses in IAS 39," Accounting in Europe, Taylor & Francis Journals, vol. 12(1), pages 1-35, June.
    • Handle: RePEc:taf:acceur:v:12:y:2015:i:1:p:1-35
    DOI: 10.1080/17449480.2015.1012526
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    References listed on IDEAS

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    1. Camfferman, Kees & Zeff, Stephen A., 2015. "Aiming for Global Accounting Standards: The International Accounting Standards Board, 2001-2011," OUP Catalogue, Oxford University Press, number 9780199646319.
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    1. Marton, Jan & Runesson, Emmeli, 2017. "The predictive ability of loan loss provisions in banks – Effects of accounting standards, enforcement and incentives," The British Accounting Review, Elsevier, vol. 49(2), pages 162-180.
    2. Basu, Sudipta & Vitanza, Justin & Wang, Wei, 2020. "Asymmetric loan loss provision models," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    3. Pucci, Richard & Skærbæk, Peter, 2020. "The co-performation of financial economics in accounting standard-setting: A study of the translation of the expected credit loss model in IFRS 9," Accounting, Organizations and Society, Elsevier, vol. 81(C).
    4. Noor Hashim & Weijia Li & John O'Hanlon, 2019. "Reflections on the development of the FASB’s and IASB’s expected-loss methods of accounting for credit losses," Accounting and Business Research, Taylor & Francis Journals, vol. 49(6), pages 682-725, September.
    5. Jannis Bischof & Holger Daske, 2016. "Interpreting the European Union’s IFRS Endorsement Criteria: The Case of IFRS 9," Accounting in Europe, Taylor & Francis Journals, vol. 13(2), pages 129-168, May.
    6. Zoltán Novotny-Farkas, 2016. "The Interaction of the IFRS 9 Expected Loss Approach with Supervisory Rules and Implications for Financial Stability," Accounting in Europe, Taylor & Francis Journals, vol. 13(2), pages 197-227, May.
    7. Albulena Shala & Skender Ahmeti & Rezearta Sh. Perri, 2017. "A Review on Accounts Manipulation via Loan Loss Provisions to Manage Earnings and Impact of IFRS," EuroEconomica, Danubius University of Galati, issue 1(36), pages 113-121, May.
    8. Bholat, David & Lastra, Rosa & Markose, Sheri & Miglionico, Andrea & Sen, Kallol, 2016. "Non-performing loans: regulatory and accounting treatments of assets," Bank of England working papers 594, Bank of England.
    9. Aristei, David & Gallo, Manuela, 2019. "Loan loss provisioning by Italian banks: Managerial discretion, relationship banking, functional distance and bank risk," International Review of Economics & Finance, Elsevier, vol. 60(C), pages 238-256.
    10. Samindi Ishara Hewa & Rajni Mala & Jinhua Chen, 2020. "IASB's independence in the due process: an examination of interest groups’ influence on the development of IFRS 9," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(3), pages 2585-2615, September.
    11. Malaquias, Rodrigo Fernandes & Zambra, Pablo, 2018. "Disclosure of financial instruments: Practices and challenges of Latin American firms from the mining industry," Research in International Business and Finance, Elsevier, vol. 45(C), pages 158-167.
    12. David Bholat & Rosa M. Lastra & Sheri M. Markose & Andrea Miglionico & Kallol Sen, 2018. "Non-performing loans at the dawn of IFRS 9: regulatory and accounting treatment of asset quality," Journal of Banking Regulation, Palgrave Macmillan, vol. 19(1), pages 33-54, January.

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