Expected credit loss vs incurred loss

Banks entered the 2008 crisis with loan loss allowances that reflected only losses that had already happened. Regulators and the G20 asked accounting standard-setters to change that, and the result was IFRS 9 and, in the US, CECL. This guide explains how the two models differ and follows a loan portfolio through three years under each.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. 3 minute read.

Short answer

Expected credit loss vs incurred loss is the change from IAS 39 to IFRS 9. Under the incurred loss model in IAS 39, an impairment allowance was recognised only after a loss event, objective evidence such as a missed payment or a borrower's financial difficulty, had occurred. Under the expected credit loss model in IFRS 9, an allowance is recognised from the day an asset is originated, based on losses expected in the future, including forecasts. The change answered criticism after the 2008 financial crisis that allowances were too little, too late.

At a glance

IAS 39
Incurred loss: allowance after a loss event
IFRS 9
Expected loss: allowance from day one
Forward-looking
Only under IFRS 9
Criticism of IAS 39
Too little, too late
Effective
IFRS 9 from 2018
US equivalent
CECL replaced incurred loss
Expected credit loss vs incurred lossIAS 39: Incurred loss: allowance after a loss event; IFRS 9: Expected loss: allowance from day one; Forward-looking: Only under IFRS 9; Criticism of IAS 39: Too little, too late; Effective: IFRS 9 from 2018; US equivalent: CECL replaced incurred loss.KEY FACTS AT A GLANCEExpected credit loss vs incurred lossIAS 39Incurred loss: allowanceafter a loss eventIFRS 9Expected loss: allowancefrom day oneForward-lookingOnly under IFRS 9Criticism of IAS 39Too little, too lateEffectiveIFRS 9 from 2018US equivalentCECL replaced incurredlossTax BakersExpected credit loss vs incurred lossIAS 39: Incurred loss: allowance after a loss event; IFRS 9: Expected loss: allowance from day one; Forward-looking: Only under IFRS 9; Criticism of IAS 39: Too little, too late; Effective: IFRS 9 from 2018; US equivalent: CECL replaced incurred loss.KEY FACTS AT A GLANCEExpected credit loss vs incurredlossIAS 39Incurred loss: allowance after a loss eventIFRS 9Expected loss: allowance from day oneForward-lookingOnly under IFRS 9Criticism of IAS 39Too little, too lateEffectiveIFRS 9 from 2018US equivalentCECL replaced incurred lossTax Bakers
Key facts at a glance, as set out in this guide.

Expected credit loss vs incurred loss: what changed?

Incurred loss (IAS 39)Expected credit loss (IFRS 9)
When is an allowance recognised?Only after objective evidence of a loss eventFrom initial recognition
Information usedPast events and current conditionsPast events, current conditions and reasonable and supportable forecasts
Performing loansCollective allowance only for losses incurred but not yet reported12-month or lifetime ECL depending on stage
Future lossesNot recognised, however likelyRecognised, probability-weighted
Assets coveredLoans and receivables, held-to-maturity and available-for-sale assets, with different modelsOne model for amortised cost and FVOCI debt, loan commitments and guarantees

A loan portfolio over three years

A bank lends 10,000,000. Year 1: the economy is stable. Year 2: unemployment forecasts rise sharply and many borrowers' credit risk increases significantly, but nobody has missed a payment. Year 3: defaults occur.

Loss allowance at each year endLoss allowance at each year end20,00050,000Year 140,000300,000Year 2420,000480,000Year 3Incurred loss (IAS 39)Expected loss (IFRS 9)
IFRS 9 recognises the deterioration in year 2; IAS 39 waits for defaults.
Year endIAS 39 allowanceIFRS 9 allowanceWhy
120,00050,000IAS 39: small allowance for losses incurred but not reported. IFRS 9: 12-month ECL on everything.
240,000300,000IAS 39: no loss events yet. IFRS 9: deteriorated loans move to stage 2, lifetime ECL, and forecasts worsen.
3420,000480,000Both: defaulted loans are impaired. IAS 39 catches up in one go.

Over the three years the total losses recognised are similar, but IFRS 9 recognises them earlier, in year 2 when the risk became visible, while IAS 39 delayed most of the charge to year 3, when the defaults had already happened.

What happened to allowances when IFRS 9 took effect?

On 1 January 2018, most banks' loss allowances rose, because performing loans now carried 12-month ECL and deteriorated loans lifetime ECL. The increase was recognised in opening retained earnings rather than in profit, and banking regulators allowed the effect on regulatory capital to be phased in over several years. Companies outside banking saw smaller changes, mainly on trade receivables, intercompany loans in parent company accounts, and financial guarantees given to subsidiaries.

What did "too little, too late" mean?

During the financial crisis, banks' allowances under the incurred loss model lagged behind obvious deterioration, because accounting did not allow losses to be recognised until loss events occurred. Allowances then rose abruptly, all at once, amplifying the downturn just when banks needed capital most. The G20 and the Financial Stability Board asked the IASB and FASB to develop models using more forward-looking information.

Is the ECL model free of problems?

No. It relies on judgement about forecasts and scenario weights, makes allowances more volatile when forecasts change, and creates a cliff effect when loans move from 12-month to lifetime ECL. During the COVID-19 pandemic, many lenders needed management overlays because models could not capture the effect of government support. See ECL stages.

What happened in the US?

The FASB replaced its incurred loss model with CECL, which goes further than IFRS 9: lifetime losses on every asset from day one, with no 12-month stage. See CECL explained and IFRS 9 vs CECL.

Need help applying the standards?

Our Chartered Accountants help finance teams and students apply IFRS and US GAAP to real transactions.

Book a call Chat on WhatsApp

Questions people ask

What is the difference between expected credit loss and incurred loss?

Incurred loss recognises an allowance only after a loss event; expected credit loss recognises one from initial recognition using forecasts.

Why did IFRS 9 replace the incurred loss model?

Because allowances under IAS 39 were criticised as too little, too late during the 2008 financial crisis.

When did IFRS 9's expected credit loss model take effect?

For annual periods beginning on or after 1 January 2018.

Does US GAAP still use an incurred loss model?

No. CECL under ASC 326 replaced it, requiring lifetime expected losses from day one.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 9 Financial Instruments

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

ECLECL stages 1, 2 and 3 explainedIFRS vs US GAAPIFRS 9 ECL vs CECL: credit loss differencesIFRS 9Expected credit losses under IFRS 9: the three stages

More in ECL

Previous in this topicSimplified approach vs general approachNext in this topicECL glossary: the terms explainedTopicAll 40 guides in ECL

This guide is general information. It is not tax or legal advice for your situation.