Chasing Myths: Common Misapplications of IFRS and Their Implications Myth 10 – Nil Impairment Losses Under IFRS 9
IFRS 9 was introduced in response to the global financial crisis that began in 2007. One of its main objectives was to address certain shortcomings identified in its predecessor (IAS 39) regarding the recognition of impairment losses on financial assets. The phrase "too little, too late" became widely associated with the impairment recognition model under IAS 39.
Indeed, #IFRS 9 fundamentally changed the paradigm of financial asset impairment by introducing a single impairment model based on expected credit losses (#ECL), thereby irreversibly shifting from an incurred loss model to an expected loss model. Conceptually, this represents a singularity in financial reporting. The post-IFRS 9 reporting framework has entered a completely different theoretical dimension.
In this regard, I draw attention to paragraph 5.5.18 of IFRS 9. When carefully analyzed, this paragraph conveys a message with profound implications for financial reporting—implications that preparers and users of financial statements have not yet fully assimilated.
5.5.18 When measuring expected credit losses, an entity need not necessarily identify every possible scenario. However, it shall consider the risk or probability that a credit loss occurs by reflecting the possibility that a credit loss occurs and the possibility that no credit loss occurs, even if the possibility of a credit loss occurring is very low.
This paragraph, specifically the portion I have highlighted in the excerpt above, means that when calculating expected credit losses (impairment), at least one loss scenario with a non-zero probability of occurrence must be considered (even if that probability is very low). Given that, as stated in paragraph 5.5.17 of IFRS 9, credit losses represent the expected value of multiple possible outcomes weighted by their respective probabilities, it follows that nil impairment losses cannot be determined.
Thus, nil impairment losses under IFRS 9 constitute conceptual errors in the application of the standard (even though, in some cases, these errors may result in immaterial distortions) and are nothing more than wishful thinking.