A comparison of the requirements of ASC 326 and IFRS 9
At a glance
Although the new credit impairment accounting guidance under both US GAAP and IFRS shifts from an “incurred” loss model to an “expected” loss model, the standards are not converged. The major difference is that under US GAAP, the entire lifetime expected credit loss on financial instruments measured at amortized cost is recognized at inception, whereas under IFRS 9, generally only a portion of the lifetime expected credit loss is initially recognized. Subsequently, if there is a significant increase in credit risk, the entire lifetime credit loss is recognized.
Many additional differences exist between the two standards, and others will likely be identified as companies continue with implementation efforts and develop modelling approaches, and as regulators respond to stakeholder inquiries.
Following the financial crisis, global accounting standard setters were asked to work towards the objective of creating a single set of high-quality global standards addressing the accounting for financial instruments. The initial converged impairment model proposed that the recognition of the full “lifetime” expected credit loss (ECL) would be delayed until there was a significant deterioration in credit risk. However, based on US constituent feedback, the FASB rejected this approach in favor of the current expected credit losses (CECL) model, which generally requires immediate recognition of “lifetime” expected credit losses at inception.
Although the impairment standards are not converged, they both adopt an expected credit loss approach, as opposed to the incurred loss approach under current guidance. Hence, the thresholds for recognition of credit impairment losses (“probable that a loss was incurred” under US GAAP, “objective evidence of impairment” under IFRS) were removed.
Under both standards, the credit loss for financial assets measured at amortized cost will be recorded through the establishment of an allowance account. The allowance will be presented as an offset to the amortized cost basis of the related asset or as a separate liability (in the case of off-balance sheet exposures, such as loan commitments and guarantees).
Under both models, an allowance is recognized upon initial recognition of financial assets measured at amortized cost and off-balance sheet commitments. With certain limited exceptions, the allowance will be recorded with an offset to current earnings. This means that under both frameworks, a “day 1 credit loss” will be recognized for most financial assets measured at amortized cost. However, the amount of this initial loss will typically differ under the two standards. The FASB’s model requires recognition of a “lifetime” expected credit losses on day 1. The IASB’s model has three stages in which generally on day 1, only a portion of lifetime ECL is recognized (i.e., the “12-months expected credit loss”). Under the IASB’s model, the lifetime ECL is generally recorded only if there is a significant increase in credit risk (SICR). However, see the section on trade receivables for a description of a simplified approach allowed (or required in certain circumstances) for trade receivables, contract assets, and lease receivables.
This publication does not cover all aspects of accounting for the impairment of financial instruments under the two standards. Readers are encouraged to familiarize themselves with the accounting guidance under each framework separately. See PwC’s Loans and investments
guide for US GAAP (LI) and PwC’s Manual of Accounting
for IFRS (MoA).
This publication describes some of the major similarities and differences between the US GAAP credit loss standard (ASC 326
) and the IFRS impairment requirements in IFRS 9. As the standards are not yet effective, additional differences might be identified as companies continue implementation efforts and modelling approaches, and as regulators provide their observations. It would therefore be beneficial to monitor the implementation activities for each standard to see if additional differences emerge.