Current expected credit losses

Current expected credit losses is the US impairment standard. From initial recognition a lender holds an allowance equal to lifetime expected credit losses across the whole portfolio, whatever the credit quality of the individual loan. There are no stages and no migration trigger.

IFRS 9 works differently. A performing loan carries only twelve months of expected loss until credit risk has increased significantly since initial recognition, at which point it moves to a lifetime measure. Both standards are forward looking and both replaced an incurred loss model criticised for recognising losses too late, but the starting allowance is very different.

The consequence candidates are asked about is the effect on growth. Under CECL a lender that originates new loans books the lifetime allowance immediately while the interest income arrives over years, so growth depresses reported earnings even when credit quality is unchanged. IFRS 9 produces the same effect in a milder form, because the stage one allowance covers twelve months only.

The comparability point follows directly. A US reporter and an IFRS reporter with identical books report different allowances, different coverage ratios and different cost of risk. Comparing them without adjusting is not a small approximation, it is a category error, and it is the kind of thing an interviewer uses to separate a candidate who has read accounts from one who has read a summary.