Measuring the procyclicality of impairment accounting regimes: a comparison between IFRS 9 and US GAAP
Series: Working Papers. 2003.
Author: Alejandro Buesa, Francisco Javier Población García and Javier Tarancón.
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Abstract
The purpose of this paper is to compare the cyclical behavior of various credit impairment
accounting regimes, namely IAS 39, IFRS 9 and US GAAP. We model the impact of credit
impairments on the Prot and Loss (P&L) account under all three regimes. Our results
suggest that although IFRS 9 is less procyclical than the previous regulation (IAS 39), it is
more procyclical than US GAAP because it merely requests to provision the expected loss
of one year under Stage 1 (initial category). Instead, since US GAAP prescribes that lifetime
expected losses are fully provisioned at inception, the amount of new loans originated is
negatively correlated with realized losses. This leads to relatively higher (lower) provisions
during the upswing (downswing) phase of the financial cycle. Nevertheless, the lower
procyclicality of US GAAP seems to come at cost of a large increase in provisions.