2.The CBUAE recognizes that the International Financial Reporting Standard IFRS 9 has introduced fundamental changes in provisioning practices in qualitative and quantitative ways. The usage of economic models and economic forecasts can lead to higher volatility in the expected loss for the calculation of IFRS 9 accounting provisions. The change from incurred loss model to expected loss model has been advocated by the global regulatory community, but the regulators are also mindful of any unintended consequences. Arising from the Covid-19 developments, the CBUAE has decided to require a phasing-in of increases in IFRS 9 expected credit loss (ECL) provisions over a transition period.
3.This Regulation provides for a ‘prudential filter’, through transitional arrangements, to smooth the impact of ECL accounting on Capital, based on a 5-year transitional period to manage the regulatory impact. The transitional phase is implemented with immediate effect, with the initial application of the transitional arrangements commencing retroactively on 1 January 2020.
4.The portion of ECL provisions that can be included in Capital will decrease incrementally over time down to zero to ensure the full implementation of IFRS 9 by 1 January 2025.
5.The CBUAE has opted to adopt a “dynamic” approach for the transition arrangements. It is aimed to address the ongoing evolution of ECL provisions (e.g. rise in ECL due to unexpectedly worsening macroeconomic outlook) during the transition period.