LO 73.2: Compare and contrast the key aspects of the IASB (IFRS 9) and

LO 73.2: Compare and contrast the key aspects of the IASB (IFRS 9) and FASB (CECL) standards.
The IASB and FASB standards are similar in that ECL must be initially recorded at the outset of all loans and updated at the end of each reporting period, taking into account any changes in credit risks of their loan assets. In addition, the standards do not require any specific catalyst to occur in order to report a credit loss. Finally, the standards mandate the use of reliable historical, current, and forecast information (including macroeconomic factors) in computing ECL. For example, both standards measure probability of default (PD) at a point in time (rather than in context of the economic cycle) and measure loss given default (LGD) and exposure at default (EAD) as neutral estimates (rather than downturn estimates).
There are two main differences between the IASB and FASB standards: 1. FASB requires ECL to be computed over the term of a loan commencing right from
the start while IASB requires a series of three stages. This difference will be discussed in more detail shortly.
IASB permits the recording of accrued interest income on delinquent loans, regardless of whether loan payments are being received. FASB requires the use of the cash basis (no interest income accrual), cost recovery method (payments applied to principal first, and once principal is repaid, the excess is recorded as interest income), or a combination of both in order to provide a more conservative and reliable method for income recognition on delinquent loans.
International Accounting Standards Board (IASB)
Under IFRS 9, ECL is reported in three stages to represent the deterioration of assets: stage 1 (performing), stage 2 (underperforming), and stage 3 (impaired). Upon loan purchase or origination, stage 1 begins and the 12-month ECL is recorded (expense on income statement and contra-asset on balance sheet). However, interest revenue is computed on the original loan amount, not the amount net of the ECL. The 12-month ECL is computed as the expected lifetime credit loss on the loan asset multiplied by the probability of default within the upcoming 12-months after the end of the reporting date.
Stage 2 for a loan asset occurs upon severe deterioration of credit quality to require classification into a high credit risk category. That would be presumed to occur after the loan is 30 days past due according to IFRS 9. The entire lifetime ECL is now recorded (based on the present value of losses due to future defaults), which is likely a large increase in amount from stage 1. The difference in computation of 12-month and lifetime ECL can be explained primarily by the maturity of the loan together with the movement of default risks and recovery values during the term of the loan. Note that the interest revenue computation in stage 2 remains the same as in stage 1.
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Topic 73 Cross Reference to GARP Assigned Reading – Cohen and Edwards
Stage 3 involves loan assets that are credit-impaired or generating credit losses. The entire lifetime ECL continues to be recorded but the interest revenue is now computed on the original loan amount less the loss allowance.
Financial Accounting Standards Board (FASB)
In contrast to IASB, FASB requires the entire lifetime ECL to be recorded as a provision from the outset instead of dealing with stages. As a result, the FASB standard will result in earlier and larger recognition of losses (whereas there is some delay in IASB for loans classified in stage 1). The two standards are the same when dealing with loans that have considerable credit deterioration (i.e., IASB stages 2 and 3).
Im pl e m e n t a t io n o f IASB a n d FASB St a n d a r d s