Effect of the Application of IFRS 9 on the Loan Loss Recognition Timeliness in the Banks of Gulf Cooperation Council Countries

Abstract

IFRS 9 replaced IAS 39 which was criticized following the financial crisis (2007-2009). IFRS 9 uses the expected credit loss (ECL) to estimate loan loss provision (LLP). With the aim of improving the loan loss recognition timeliness (LLRT), ECL requires incorporating the future expected information, in addition to the current and historical information, when estimating the LLP. Few studies have addressed this issue and confirmed the LLRT improvement. This study tries to provide new evidence from a different environment, as it estimates the effect of IFRS 9 adoption on the LLRT of the banks listed in the exchanges of the Gulf Cooperation Council (GCC) countries. The results indicate that the advantages of IFRS 9 have not been achieved, since no LLRT improvement has been observed; GCC banks consider only the current and historical information when estimating the LLP. Moreover, the results show that GCC banks may use the LLP for earnings and regulatory capital management. Accordingly, it is important to enhance regulatory oversight to ensure the appropriate application of IFRS 9 by these banks. Furthermore, the IASB should adequately consider the circumstances prevailing in different environments when issuing or modifying its standards.