  After the release of the final accounting standards for impairment in July
2014 by the IASB, banks will face the next significant methodological challenge
after Basel 2. In this paper, first methodological thoughts are presented, and
ways how to approach underlying questions are proposed. It starts with a
detailed discussion of the structural conservatism in the final standard. The
exposure value iACV(c) (idealized Amortized Cost Value), as originally
introduced in the Exposure Draft 2009 (ED 2009), will be interpreted as
economic value under amortized cost accounting and provides the valuation
benchmark under IFRS 9. Consequently, iACV(c) can be used to quantify
conservatism (ie potential hidden reserves) in the actual implementation of the
final standard and to separate operational side-effects caused by the local
implementation from actual credit risk impacts. The second part continues with
a quantification of expected credit losses based on Impact of Risk(c) instead
of traditional cost of risk measures. An objective framework is suggested which
allows for improved testing of forward looking credit risk estimates during
credit cycles. This framework will prove useful to mitigate overly pro-cyclical
provisioning and to reduce earnings volatility. Finally, an LGD monitoring and
backtesting approach, applicable under regulatory requirements and accounting
standards as well, is proposed. On basis of the NPL Dashboard, part of the
Impact of Risk(c) framework, specific key risk indicators are introduced that
allow for a detailed assessment of collections performance versus LGD in in NPL
portfolio (bucket 3).
