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After the release of the final accounting standards for impairment in July2014 by the IASB, banks will face the next significant methodological challengeafter Basel 2. In this paper, first methodological thoughts are presented, andways how to approach underlying questions are proposed. It starts with adetailed discussion of the structural conservatism in the final standard. Theexposure value iACV(c) (idealized Amortized Cost Value), as originallyintroduced in the Exposure Draft 2009 (ED 2009), will be interpreted aseconomic value under amortized cost accounting and provides the valuationbenchmark under IFRS 9. Consequently, iACV(c) can be used to quantifyconservatism (ie potential hidden reserves) in the actual implementation of thefinal standard and to separate operational side-effects caused by the localimplementation from actual credit risk impacts. The second part continues witha quantification of expected credit losses based on Impact of Risk(c) insteadof traditional cost of risk measures. An objective framework is suggested whichallows for improved testing of forward looking credit risk estimates duringcredit cycles. This framework will prove useful to mitigate overly pro-cyclicalprovisioning and to reduce earnings volatility. Finally, an LGD monitoring andbacktesting approach, applicable under regulatory requirements and accountingstandards as well, is proposed. On basis of the NPL Dashboard, part of theImpact of Risk(c) framework, specific key risk indicators are introduced thatallow for a detailed assessment of collections performance versus LGD in in NPLportfolio (bucket 3).

Methodological thoughts on expected loss estimates for IFRS 9 impairment: hidden reserves, cyclical loss predictions and LGD backtesting