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Credit Risk According to IFRS 9: Significant Increase in Credit Risk and Implications for Financial Institutions

This study explores the literature about definitions and concepts when a significant increase in credit risk is achieved. In response to the financial crisis the IASB has introduced a new standard (IFRS 9) on impairment, which requires a three-step approach, which in general replaces the current incurred impairment model with a new expected loss model. This research paper summarizes alternative impairment models and particularly focus on the significant deterioration criteria, which is a cornerstone of the new IFRS 9 impairment model. The expected loss model is not completely new within the accounting literature. The study provides early insights into implementation of IFRS 9 on impairment, as IFRS 9 will become applicable 2018. It is also relevant for regulators, as it becomes obvious due to the nonexistence of a dominant approach, the question arises if the regulator should provide more guidance to avoid that all companies pursue completely different models resulting in decreasing comparability for investors.