Accounting for Default Risk Under IFRS 9

Abstract

Financial crises induced an intense debate about different accounting models for credit losses and a large number of contributions in literature. A gap between accounting research and finance was revealed. Within this gap our paper is focused on accounting for default risk of bonds according to IAS 39 vs. the exposure draft of IFRS 9 Financial Instruments: Amortised Cost and Impairment. For our analysis we use a simple multi-period structural binomial model for credit default risk. The analysis shows that information given by ED IFRS 9 leads to a more fair value conform accounting, but is still insufficient to avoid unfavorable investment decisions because no unique decomposition in prerequisite decision parameters is possible.We explain why a market oriented way of reporting for default risk by incorporating the value of a total return swap could overcome the disadvantages of unverifiable and therefore non auditable measures for credit default risk.