#Japan #Financial Institutions #Chiyoda #EY Japan #Expected Credit Loss

EY Japan's Commitment to the Expected Credit Loss Model

EY Japan, headquartered in Chiyoda, Tokyo, has recently announced the initiation of comprehensive services aimed at assisting financial institutions in transitioning to the Expected Credit Loss (ECL) model. This effort aligns with the Japanese Accounting Standards Board's (ASBJ) push for reforms in the financial instruments accounting standards, necessitating the adoption of an ECL approach to measuring loan loss provisions based on future forecasts.

The ASBJ is working to ensure alignment with International Financial Reporting Standards (IFRS) No. 9, which requires that provisions for doubtful debts are evaluated based on anticipated credit risks. A key milestone in this reform process was the public release of the draft for the revised financial instruments accounting standards on October 29, 2025.

Previously, provisions were calculated primarily using historical default data. However, the new ECL model seeks to reflect changes in the economic environment, offering significant advantages such as early recognition of future expected credit risks and an improvement in the financial health of firms, particularly within the banking sector. This transition is also expected to enhance the international comparability of financial disclosures, allowing corporations to provide more transparent financial information to investors.

Nevertheless, the ECL model brings its own challenges, particularly in uncertain economic climates. As future expected information becomes integral to calculating provisions, businesses may face heightened volatility in their financial outcomes. Notably, in instances where there is a Significant Increase in Credit Risk (SICR), firms will need to allocate provisions across the entire duration of loans, potentially leading to increases in loan loss reserves. Moreover, successful implementation of this model requires establishing robust data infrastructure and IT support, making it crucial for financial institutions to respond strategically and with foresight.

To address these expectations, EY Japan has formed a new team in collaboration with EY ShinNihon LLC and EY Strategy and Consulting Co., Ltd. Both arms bring together deep expertise in accounting standards reform and risk management from EY ShinNihon and rich experience in operational reform and IT integration from EYSC. Together, they provide integrated support across various sectors for effective compliance with the revised standards, covering from planning to execution. Their services include:
1. Impact surveys based on the revised standards
2. Business process reviews
3. Development and validation of the ECL model
4. Data infrastructure enhancement and system adaptations
5. Disclosure improvements
6. Internal controls and governance establishment

Through this comprehensive approach, EY Japan aims not only to assist in constructing and validating ECL models but also to evaluate the scope and magnitude of impacts on business operations. Their proficient support extends to revisions in business processes and system upgrades, equipping firms to navigate necessary changes effectively. They offer assistance with new disclosure requirements and help build necessary internal control measures to ensure compliance with the revised standards.

Leader's Insights

In a recent statement, Hiroki Yatsui, Associate Partner of the Financial Services Department at EY ShinNihon LLC, highlighted the firm’s extensive experience in developing future-focused models. With their assistance, major banks can build ECL models based on key parameters like default rates (PD) and loss given default (LGD). Their wide-ranging expertise allows them to support multiple industries in transitioning to these revised standards effectively.

Additionally, Shunsuke Suzuki, Partner of Financial Services Risk Management at EY Strategy and Consulting, pointed out that the revised standards necessitate new requirements such as SICR assessment and effective yield calculations. This enhances the demand for individual businesses to implement statistical models, overhaul operational processes, and enhance IT infrastructure. EY Japan is committed to supporting organizations through this transformative journey, ensuring they establish the necessary operations, IT frameworks, and internal audits to meet the new standards.

For detailed information regarding the service offerings related to the impacts of the financial instruments accounting standards reform and a roadmap for engagement, please refer to EY Japan's official website.

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About EY ShinNihon LLC

EY ShinNihon LLC, a member firm of EY in Japan, primarily offers audit and assurance services along with advisory services. Further details can be found on their official website.

About EY’s Consulting Services

EY’s consulting services aim to transform businesses through human power, technology, and innovation, contributing to a better society. The company aspires to be a global leader in transformation, with over 70,000 consultants leveraging their diversity and skills to prioritize humans, expedite technology application, and foster large-scale innovation, thus creating long-term value for people, clients, and society. Learn more at their consulting page.