Publication Type

Journal Article

Publication Date

12-2021

Abstract

Using an experimental setting, this paper examines the impact of the International Financial Reporting Standard (IFRS 9) expected credit loss (ECL) approach on accounting conservatism. The ECL approach enables banks to incorporate loan loss provisions (LLP) on a timelier basis and help bank regulators anticipate weaknesses in banks’ loan portfolios. Conversely, the ECL model could be more susceptible to managerial discretion. More conservative bank managers might make excessivecredit provisions. Our findings show that high conservatism is positively associated with higher levels of LLP. In addition, the effect of accounting conservatism is contingent upon the type of loan loss model. We find evidence suggesting that when the ECL model is used, high conserv atism leads to higher provisions. In contrast, when the incurred loan loss (ILL) model is used, accounting conservatism does not seem to impact the magnitude of LLP. Overall, our study provides insights on ramifications in IFRS 9 implementation.

Keywords

IFRS 9, expected loss model, loan loss provisions, accounting conservatism

Discipline

Accounting | Corporate Finance

Research Areas

Corporate Reporting and Disclosure

Publication

Accountancy Business and the Public Interest

Volume

20

First Page

426

Last Page

443

ISSN

1745-7718

Publisher

AABA

Copyright Owner and License

Authors

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