Testing the Efficacy of Replacing the Incurred Credit Loss Model with the Expected Credit Loss Model

We use a controlled laboratory environment to provide evidence on the potential efficacy of the replacement of the Incurred Credit Loss (ICL) Model of International Accounting Standard (IAS 39) by the Expected Credit Loss (ECL) model of IFRS 9 to account for credit impairment losses. We focus on the simplified version of the ECL model using an uncertain production environment as the context. We induce incentives consistent with the existing …