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Current expected credit loss model adoption

Aurelius Aaron¹; Xiaoli Jia²; Jeffrey Ng³; Janus Jian Zhang⁴

¹ School of Accounting and Finance The Hong Kong Polytechnic University Hung Hom Hong Kong · ² School of Accounting Southwestern University of Finance and Economics Chengdu Sichuan China · ³ Faculty of Business and Economics, The University of Hong Kong Pokfulam Hong Kong · ⁴ Department of Accountancy, Economics and Finance Hong Kong Baptist University Kowloon Hong Kong

The mandatory switch from the incurred loss model to the more forward‐looking current expected credit loss (CECL) model was originally scheduled to begin in 2020. However, when the COVID‐19 pandemic started in early 2020, US regulators made the switch voluntary. Our study investigates how banks' exposure to the pandemic affects their decision to adopt CECL as well as adopting banks' pandemic‐era pattern of loan loss provisions. First, consistent with pandemic‐driven economic uncertainty reducing banks' willingness to adopt the new model, we find a negative association between banks' pandemic exposure and their CECL adoption. This association is more pronounced for banks with more lending opportunities, more lending competition, and worse loan quality. Second, compared with non‐adopters, CECL adopters report more loan loss provisions during the pandemic's early period, and less or even negative loan loss provisions during the late period. The latter scenario reflects a reversal of earlier loan loss reserves and is more pronounced for banks with more exposure to states with a higher level of vaccination, consistent with banks having a more positive economic outlook because of improving pandemic conditions. Overall, our study offers useful insights into the adoption and implementation of accounting standards during periods of economic uncertainty.

DOI

10.1111/1911-3846.13078

Volume

42 (4)

Pages

2915-2948

Language

en

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BibTeX

Sources

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