Manage Expected Credit Losses

Eagle’s accounting solutions allows you to process expected credit losses (ECL) when you use an accounting basis of IFRS or US GAAP. You can process ECL for a group of assets/collective level (not applicable to AFS investments) or at the individual lot level (asset level).

Global accounting standard setters were asked to work on creating a single set of high-quality global standards addressing the accounting for impairments. The IFRS developed an impairment model based on stages of expected credit losses. The FASB decided on a current expected credit loss model (CECL) which generally requires immediate recognition of lifetime expected credit losses at inception. While the IFRS and U.S GAAP approaches are different, both organizations adopted an expected credit loss approach as opposed to an incurred loss approach. Therefore the requirement for recognition of a credit loss under U.S. GAAP requiring probability that a loss was incurred or under IFRS that there was objective evidence of impairment were removed. 

ECL and IFRS

The IFRS model utilizes two different measurement objectives for credit impairment allowance based on 12 months of expected losses and lifetime expected losses. Expected credit losses are recognized for security investments classified with the regulatory category of Amortized Cost or Fair Value-Other Comprehensive Income (OCI) by stages:

• Stage1. Have not deteriorated significantly in credit quality or have low credit risk.

• Stage 2. Deteriorated significantly in credit quality since initial recognition (unless low credit risk at reporting date) and not having objective evidence of impairment.

• Stage 3. Objective evidence of impairment at reporting date.

Investments classified in stage 1 require an allowance based on 12 months of expected losses while stage 2 and 3 require an allowance based on lifetime expected losses.

ECL and US GAAP

Under U.S. GAAP, the CECL model applies to financial investments classified with the regulatory category Held-to Maturity, non-cancellable loan commitments that are not accounted for at fair value and other investments that are not included in our development (for example, loans carried at amortized cost, financial guarantees not accounted for at fair value, net investment in leases and trade and reinsurance receivables).

A separate credit loss model applies under U.S GAAP for investments classified in the Available-for-Sale regulatory category. Therefore the CECL model does not apply to investments classified in this regulatory category. For available-for-sale debt securities, entities will be required to record a writedown if fair value is less than amortized cost if they have (1) an intent to sell the security or (2) are more likely than not required to sell the security before recovering its amortized cost. If (1) or (2) are not applicable, the entity is required to determine if a credit loss exists. If a credit loss exists, the entity must recognize an allowance for credit losses rather than a reduction to the carrying value of the asset and any additional loss is recorded as a non-credit loss.