From IAS 39 to IFRS 9: Understanding Expected Credit Loss

A practical, business‑friendly overview of how the Expected Credit Loss (ECL) model under IFRS 9 differs from the incurred loss model under IAS 39, and what it means for trade receivables, loans and other financial assets.

he move from IAS 39 to IFRS 9 is one of the most significant shifts in financial reporting in recent years, especially in how businesses recognise credit losses.

This article explains, in practical terms:

• How IFRS 9 is different from IAS 39, and

• What the Expected Credit Loss (ECL) model means for trade receivables, loans and other financial assets.

  
  

It is intended as a concise, business‑friendly summary, not a technical manual.

1. IAS 39 vs IFRS 9 – What Changed?

1.1 IAS 39: “Incurred loss” – reactive and backward‑looking

Under IAS 39, impairment was based on an incurred loss model:

You recognised an impairment only after there was objective evidence of a loss, such as:

• Significant financial difficulty of a customer

• Default or delinquency in payments

• Observable data indicating a measurable decrease in estimated future cash flows

Until such a loss event occurred, no impairment was recorded, even if risk was clearly rising.

This approach was criticised for:

• Recognising losses too late, especially during financial crises

• Being backward‑looking, relying heavily on past events rather than forward‑looking information

• Allowing similar portfolios in different entities to show very different levels of provisions

  
  

1.2 IFRS 9: “Expected credit loss” – proactive and forward‑looking

IFRS 9 replaces the incurred loss model with an Expected Credit Loss (ECL) model:

• You recognise expected credit losses from initial recognition of the asset.

• You consider:

  • Past events (historical credit loss experience)

  • Current conditions (e.g. payment patterns, customer risk)

  • Reasonable and supportable forecasts of future economic conditions

IAS 39: “We recognise losses when the problem is evident.”IFRS 9: “We recognise losses when the risk is evident.”

The result is earlier, more systematic and more transparent recognition of credit risk.

2. What is Expected Credit Loss (ECL)?

Under IFRS 9, ECL is the probability‑weighted estimate of credit losses over the relevant period, discounted to present value.

It is driven by three core ideas:

• Probability of Default (PD) – How likely is it that a customer or borrower will default?

• Loss Given Default (LGD) – If default happens, how much will we lose, considering collateral, guarantees and recoveries?

• Exposure at Default (EAD) – How much will be outstanding at the point of default?

ECL = PD × LGD × EAD (across possible scenarios, discounted)

This calculation can be simple and matrix‑based for trade receivables, or more model‑driven for banks and lenders. IFRS 9 does not prescribe one single method, but it requires that the method is reasonable, supportable and documented.

3. Which Assets Are Subject to ECL?

The ECL model applies to financial instruments that are subject to impairment under IFRS 9, including:

• Trade receivables

• Loans and advances to customers, group companies or employees

• Contract assets under IFRS 15 (unbilled revenue)

• Lease receivables under IFRS 16

• Certain loan commitments and financial guarantee contracts

  
  

Assets measured at fair value through profit or loss (FVTPL) are not subject to ECL, as changes in credit risk are already reflected in fair value.

4. The Three‑Stage Model (General Approach)

For most loans and similar financial assets, IFRS 9 introduces a three‑stage approach based on changes in credit risk since initial recognition.

Stage 1 – Performing (no significant increase in credit risk)

• Applies when credit risk has not increased significantly since initial recognition.

• You recognise 12‑month ECL:

  • Not the losses expected in the next 12 months,

  • But the portion of lifetime losses that result from default events that could occur within the next 12 months.

• Interest revenue is calculated on the gross carrying amount (before loss allowance).

Stage 2 – Underperforming (significant increase in credit risk)

• Applies when credit risk has increased significantly, but the asset is not credit‑impaired.

• You recognise lifetime ECL (all expected losses over the life of the asset).

• Interest is still calculated on the gross carrying amount.

Stage 3 – Credit‑impaired

• Applies when there is objective evidence of impairment, for example:

  • Significant financial difficulty of the borrower

  • Breach of contract (e.g. default or significant past‑due status, often > 90 days)

  • Concessions granted due to financial difficulty

• You also recognise lifetime ECL.

• However, interest revenue is calculated on the net carrying amount (after deducting the loss allowance).

  
  

Key point: movement between stages is driven by changes in credit risk, not simply by time passing.

5. Simplified Approach for Trade Receivables and Contract Assets

For most corporates, the most important area is trade receivables (and sometimes contract assets).

To make this more practical, IFRS 9 allows (and in some cases requires) a simplified approach:

• For trade receivables without a significant financing component, and for many contract assets, you always recognise lifetime ECL.

• You do not track Stage 1 vs Stage 2 vs Stage 3 for these balances, although you still identify when an asset becomes credit‑impaired.

  
  

In practice, many entities use a provision matrix based on:

• Ageing buckets (e.g. current, 1–30 days past due, 31–60 days, 61–90 days, over 90 days), and

• Historical loss rates per bucket, adjusted for:

  • Changes in customer risk profiles

  • Economic outlook and sector‑specific trends

  • Any credit enhancements (e.g. guarantees, credit insurance)

This approach is relatively straightforward to operate and can be very effective if:

• Historical data is reliable and relevant, and

• Adjustments for forward‑looking information are clearly supported and documented.

  
  

6. Forward‑Looking Information and Scenarios

A major difference between IAS 39 and IFRS 9 is the explicit requirement to factor in forward‑looking information.

Entities must:

• Consider macroeconomic indicators relevant to their portfolio, such as:

  • GDP growth, unemployment, inflation

  • Interest rates and exchange rates

  • Property or commodity prices

  • Industry‑specific indicators (e.g. oil price for energy sector, freight rates for shipping, etc.)

• Develop at least two or three scenarios (e.g. base, upside, downside) and assign probabilities to them.

• Reflect the impact of each scenario on PD, LGD and EAD, and therefore on the ECL.

  
  

This means that:

• ECL provisions may increase in periods of economic uncertainty, even if actual defaults have not yet risen.

• Conversely, an improving outlook may reduce ECL.

The use of scenarios is a key area of judgement and often a major focus for auditors and regulators.

7. Identifying a Significant Increase in Credit Risk (SICR)

Determining when to move an asset from Stage 1 to Stage 2 (i.e. when there is a significant increase in credit risk) is one of the more judgemental aspects of IFRS 9.

Typical indicators include:

• Significant deterioration in internal or external credit ratings

• Sustained delays in payment (e.g. more than 30 days past due is often used as a “backstop”)

• Adverse changes in business, financial or macroeconomic conditions affecting the borrower

• Restructurings that signal increased risk, but are not yet credit‑impaired

  
  

Entities must:

• Define clear SICR criteria and thresholds,

• Align them with internal credit risk management, and

• Apply them consistently across portfolios.

8. Disclosure and Communication

IFRS 9 also brings more transparency about credit risk through enhanced disclosure requirements, including:

• Credit risk management practices and how they link to the ECL methodology

• Reconciliations showing movements in loss allowances (by class of financial asset and by stage)

• Ageing analyses of trade receivables

• Explanations of:

  • Key assumptions and judgements

  • Use of forward‑looking information and scenarios

  • Sensitivity of ECL to key economic inputs

For many corporates, the narrative around ECL is as important as the numbers themselves, particularly if:

• ECL is material, or

• There are visible year‑on‑year changes driven by the economic environment.

Clear explanations help stakeholders understand why provisions have changed, rather than assuming that higher ECL always means “worse credit quality”.

9. How We Can Support You

Whether your exposure is mainly trade receivables or includes more complex loan portfolios, a practical and robust ECL framework is essential.

We can assist with:

• Reviewing your current IFRS 9 / ECL approach against good practice

• Designing or refining provision matrices for trade receivables

• Supporting the incorporation of forward‑looking information and scenarios

• Helping improve data, systems and internal controls around ECL

• Assisting in drafting clear, concise disclosures and management explanations

• Providing training for finance teams, management and boards on IFRS 9 and ECL

  
  

10. Final Thoughts

IFRS 9’s Expected Credit Loss model is more demanding than IAS 39’s incurred loss approach, but it also provides a richer, more timely picture of credit risk.

A well‑designed ECL framework should:

• Be compliant with the standard,

• Be proportionate to the size and complexity of your exposures, and

• Provide useful insights for managing credit risk, not just for meeting accounting requirements.

  
  

f you would like to discuss how IFRS 9 and the ECL model affect your business, please contact us:

Email: info@consulting-ect.comPhone: 050 969 0423

This article is a general overview and does not constitute professional advice. You should consider your specific circumstances and seek tailored guidance before making decisions or changes to your financial reporting policies.