Robust Internal Controls: A Prerequisite to Efficient ECL Provisioning

Establishing strong internal controls for effective ECL provisioning 

The International Accounting Standards Board (IASB) published IFRS 9 — Financial Instruments mandating a new expected loss impairment model and laying down guidelines on the classification and measurement of financial assets. Meeting the stringent impairment provisioning requirements prescribed by IFRS 9 underscore the need for strong internal control systems to ensure reliable financial reporting. Banks have been using the incurred loss accounting model to calculate impairment loss but IFRS 9 replaces this with the expected credit loss (ECL) accounting model. Calculating impairment loss based on the ECL model demands enormous amounts of data, calculations, and judgment. IFRS 9 compliance will therefore require a complete evaluation and validation of internal control processes. To establish strong internal controls, banks must:

• Identify areas requiring strong controls
• Determine the different functions that impact ECL calculations
• Ensure continuous monitoring