Insights from IFRS 9 disclosures

IFRS 9 disclosures help illustrate what CECL disclosures may look like.


From the IFRS Institute - Aug 31, 2018 

Abstract: One of the biggest changes that CECL brings to US GAAP is expanded qualitative disclosures describing the methodologies, policies and assumptions used to determine expected credit losses. KPMG has been reviewing the impairment disclosures of financial institutions reporting under IFRS 91, which has similar disclosure requirements, to understand what the disclosures might look like under CECL.

Insights from IFRS 9 disclosures

The clock is ticking for US GAAP reporters on the implementation of the Current Expected Credit Loss (CECL) model2; and although the standard affects all companies, it is one of the largest accounting changes for financial institutions subject to US GAAP (‘US banks’) in recent history. Your company is probably in the middle of assessing new accounting policies, overhauling modeling methodologies, considering upgrades to supporting technology infrastructure and identifying changes to your internal control environment.

Financial statement users will assess the outcome of the adoption of CECL using quarterly and/or annual financial statements and disclosures. One of the biggest changes in disclosures is the expansion of qualitative information to describe your company’s inputs, assumptions and techniques for determining expected credit losses. ASC 326requires qualitative disclosures, but what will they really look like?

To gain insight, KPMG has been following the qualitative credit loss disclosures by ‘international banks’ (i.e. financial institutions subject to IFRS) that have adopted and are reporting under IFRS 9. The measurement of credit losses on financial assets under IFRS 9 differs from that under CECL (see our article, Impairment under IFRS 9 for US companies). However, the qualitative disclosure requirements are similar. Therefore, international banks’ disclosures may have set the tone for the type of information and level of detail that investors can expect for ‘expected credit losses’.

In May 2018, the European Central Bank published the results of the ECB Banking Supervision’s thematic review of IFRS 9 implementation preparedness conducted in 2016. This review highlighted a number of challenges faced by institutions in their progression toward the implementation of
IFRS 9, which may be similar when implementing CECL.


Key accounting and modeling decisions and related judgments

Both CECL and IFRS 9 require companies to describe how expected loss estimates are developed. There are differences in the specific disclosure requirements, but their objective is similar: to allow investors to understand management’s method for developing expected credit losses and the information used in developing the estimate. Specific disclosure requirements from each standard include the following.

CECL4     IFRS 95

An entity shall disclose … by portfolio segment and major security type:

  • A description of how expected loss estimates are developed
  • A description of the entity’s accounting policies and methodology to estimate the allowance for credit losses, as well as a discussion of the factors that influenced management’s current estimate of expected credit losses, including:
    • Past events
    • Current conditions
    • Reasonable and supportable forecasts …

An entity shall explain the inputs, assumptions and estimation techniques used to apply the impairment requirements of IFRS 9. An entity shall disclose:

  • The basis of inputs and assumptions and the estimation techniques …
  • How forward-looking information has been incorporated into the determination of expected credit losses, including the use of macroeconomic information …


Neither standard is prescriptive. Each company should decide how detailed or specific these disclosures should be based on their facts and circumstances. With this in mind, here is what we found from the disclosures of 14 international banks.


IFRS 9 Disclosure observation CECL takeway

All international banks provided required transition disclosures in the first reporting period, covering the following areas:

  • Opening loss allowance reconciliation from the previous standard to IFRS 9
  • Analysis of opening loss allowance under IFRS 9 by class of financial instrument
  • Changes in accounting policies

The opening balance sheet under CECL will include an allowance for loan and lease losses6 (ALLL) that differs from the immediate prior closing balance.

Like IFRS, CECL requires transition disclosures in the period of adoption. An explanation of how expected loss estimates are developed should be provided.

Unlike IFRS, there is no specific requirement to disclose an opening loss allowance analysis by class of asset or a reconciliation to the prior year balance. All international banks provided a reconciliation and analysis by class of instrument, thereby likely creating an expectation from financial statement users. Therefore, US banks should consider how much insight to include in the opening ALLL balance. It may be helpful to explain how that balance was derived, and to reconcile it to the previous closing ALLL balance.

11 international banks disclosed which macro-economic variables were used in their expected credit loss models in the aggregate.

5 international banks disaggregated that disclosure by retail versus wholesale portfolios.

Examples of variables disclosed included:

  • Retail: GDP growth, unemployment rates, house prices, interest rates
  • Wholesale: Equity index, commodity prices, commercial property, credit spreads

While IFRS 9 explicitly requires disclosure of how macroeconomic information was used in the estimate, many of the international banks disclosed which economic variables were actually used. Further, 5 of the international banks disclosed the variables used by portfolio type.

Unlike IFRS, CECL does not explicitly require disclosure of macroeconomic variables. However, those assumptions may be needed when discussing current conditions and reasonable and supportable forecasts. US banks may conclude that disclosing which macroeconomic variables are used in the expected credit loss calculations is relevant to satisfy the US GAAP requirements. Further, US banks should also consider disclosing this by portfolio type, if useful to investors.

All international banks disclosed the number of forward-looking economic scenarios used.

  • 53% used 3 scenarios; the remaining used greater than 3 scenarios
  • 14% disclosed the type of methodology used

Unlike IFRS, CECL permits, but does not require, the use of multiple forward-looking economic scenarios to estimate expected credit losses.

Almost half of the international banks used more than the minimum number of required scenarios (3). Therefore, US banks should consider if using multiple scenarios is a key component of their process and internal controls. Further, if US banks choose to use multiple forward-looking economic scenarios, that fact may need to be disclosed.

A minority of the international banks disclosed the type of methodology used in their forward-looking analysis. However, all international banks making the disclosure indicated that a Monte-Carlo methodology was used. 

All international banks disclosed qualitative information related to the estimation methodology used, a description of inputs to the methodology and other key decisions.

Specific items of note include:

  • 6 banks disclosed that they use different methodologies in defining a significant increase in credit risk (a key decision) based on the individual portfolio and further disclosed details of the methodologies used to define this key metric for each portfolio
  • 10 banks used a methodology that used PD7 in their assessment of the significant increase in credit risk

Like IFRS, CECL requires preparers to describe how estimates are developed and which methodologies are used to estimate expected credit losses.

While the specifics are different between the standards, the international banks’ disclosures can be related to CECL because CECL permits the following:

  • Different methodologies for different portfolios in estimating expected credit losses. When different methodologies are used across various portfolios, US banks should consider disclosing those methodologies and relevant key decisions used at each portfolio level.
  • A methodology that uses PD and loss given default to estimate expected credit losses. Most international banks described how PD is defined in their calculation. US banks should consider doing the same in their disclosures.

Start with an assessment

Professionals in KPMG’s global network of member firms have helped a number of companies understand the impact of these new rules and are assisting in the implementation of the required changes. Reza van Roosmalen, a KPMG Advisory partner and CECL specialist, provides companies with holistic advice to uncover how accounting and financial reporting policies, processes, controls and systems require change to comply with the new rules. Reza stressed not to underestimate the impact that IFRS 9 can have on your organization. Like most accounting change start early with the assessment and seek advice to gather critical insights into how your company, regardless of industry, will be affected and the steps they can take to ease the transition to the new standards.


1 IFRS 9, Financial Instruments

2 For SEC filers, CECL is effective for financial reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. For non-SEC filer public business entities, CECL is effective for financial reporting periods beginning after December 15, 2020, including interim periods within those fiscal years. For all other entities, CECL is effective for annual financial reporting periods beginning after December 15, 2020, and for interim periods within fiscal years beginning after December 15, 2021. The FASB has agreed to propose extending the effective date for non-public business entities to December 15, 2021 for annual financial reporting periods and interim periods within those fiscal years.

3 ASC 326, Financial Instruments—Credit Losses

4 ASC 326-20-50-11

5 IFRS 7.35G

6 The FASB has agreed to propose limiting the scope by excluding operating lease receivables.

7 Probability of default

Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

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