Pursuing Financial Stability under the Guise of Decision Usefulness? An Analysis of the IFRS 9 Expected Credit Loss Model in Light of the Public Interest

Abstract

In response to the financial crisis, the IASB’s mission statement of 2015 clarifies that the IASB serves the public interest by developing standards which produce decision useful information for capital providers. Thereby, IFRS are assumed to contribute in the long term to financial stability which the IASB clearly deems as the objective of prudential regulation. This paper takes the introduction of the expected credit loss model in IFRS 9 as a case to study the validity of the causalities set out in the mission statement in more depth. Our analysis comprises the IASB’s documentation, including all comment letters, and public discourses surrounding the drafting process of IFRS 9. We argue that the ex-ante-recognition of day-1-losses, as required by IFRS 9, exceeds the realm of providing decision useful information for investors, since it prescribes a temporary retention of equity for all IFRS preparers – similar to prudential capital buffers. The relationship of decision usefulness and financial stability considerations, as claimed in the IASB’s mission statement, is therefore reversed. Our analysis of the drafting process of IFRS 9 shows that the incorporation of day-1-losses resembles a compromise stemming from concessions to constituents, others than investors, including the FASB, preparers and the political-regulatory sphere. Along this line, our paper sheds light on the practical limitations of theoretical ‘guidance’-documents such as the mission statement, which sketch ideal states of affairs, and questions whether the investor-only focus brought forward in the mission statement adequately reflects how the IASB actually works in the public interest.

Keywords: Conceptual framework, Expected credit loss model, Financial reporting objectives, Financial stability, IFRS 9, Prudence, Prudential regulation, Public interest

JEL Classification: E50, G28, G32, M41, M48