THE IMPACT OF THE EXPECTED CREDIT LOSS MODEL ON THE FINANCIAL STATEMENTS OF BANKS

Starting from 2005 all listed companies in the European Union are obliged to prepare and present consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). During the past decade, IFRS had experienced substantial shift towards fair value accounting involving numerous assumptions and estimates as well as complex measurement and impairment approaches implicit in IFRS 9 Financial Instruments. These major changes have resulted in a completely different accounting overall, which significantly impacts the financial statements of companies in general and financial institutions in particular. Implementation of the new impairment standards is expected to improve transparency to investors and help to better reflect the emerging risks inherent in the loan portfolios of banks (Edwards, 2016). Since the banking industry is a very relevant component of the world’s economy, it is important to understand the challenges that the banks may face when adopting to IFRS9. Therefore, using a case study of a bank in a developing country, the aim of this project is to demonstrate how the main changes introduced by IFRS9, in particular the new impairment model, impact the financial statements of banks. The proposed case study will be useful to the students of master’s program in accounting and finance in order to understand the practical application of the Expected Credit Loss (ECL) model for the impairment of credit loans and its effect on the overall financial statements of banks. The case study is also intended to enhance the students’ understanding of the “real world situation” when it comes to adapting the financial statements to the new International Financial Reporting standard and to raise awareness of the perspective of the bank’s management, supervisors, regulators as well as other stakeholders and users of financial reporting information.