Tips for producing high-quality expected credit loss information

The Expected Credit Loss Disclosure Task Force has issued updated guidance on IFRS 9, Expected Credit Loss (ECL) Accounting Disclosures.

The group, set up by the Financial Reporting Council, the Financial Conduct Authority and the UK’s Prudential Regulation Authority, has released a third report which includes a comparison of preparer and user assessments of adopting the task force’s recommendations, examples of best practice disclosures, and other changes to address gaps and shortcomings or improve existing material.

The report is based on the requirements of IFRS 7, Financial instruments: Disclosuresand the recommendations of the December 2015 report of the Enhanced Disclosure Task Force.

“ECL is important but complex, and it’s not easy to deliver information that gives users what they need. This third report will further help preparers focus their information on what’s important and do an appropriate level of granularity,” task force co-chairman Simon Samuels said in a statement. Press release.

The guidance is primarily aimed at larger banks and building societies headquartered in the UK, but is also likely to be relevant to a wider group of preparers.

IFRS 7 explains that the objective of its credit risk disclosures is “to enable users of financial statements to understand the effect of credit risk on the amount, timing and uncertainty of future cash flows. “.

The report states that high-quality ECA-related disclosures should:

  • Present complex concepts and the results of ECL calculations in a clear and understandable manner.
  • Present relevant information about material items that reflect a bank’s business and risk exposures.
  • Provide a range of information that, when taken together, provides insight into the effects of the policies, methodologies, data, and assumptions used to determine ECLs.
  • Explain judgments and estimates that are important in determining ECLs and to facilitate comparison of a bank’s results over time.
  • Facilitate better comparability between banks and help users better understand the reasons for differences in their risk exposures and provisioning levels.

Adoption of the updated guidelines is encouraged now. Guidance is “ideally and to the extent practicable” for accounting periods ending on or after December 31, 2023.

— To comment on this article or suggest an idea for another article, contact Steph Brown at [email protected]om.