Home-collected credit lender Morses Club updated the market on its trading on Wednesday, as well as issuing an IFRS 9 update.
The AIM-traded company said it was continuing to trade in line with expectations, with its board noting a "strong performance" over the seasonally busy Christmas period.
It said the IFRS 9 'financial instruments' was effective for accounting periods commencing from 1 January 2018, replacing IAS 39 'financial instruments: recognition and measurement'.
IFRS 9 required the recognition of impairment on customer receivables through an expected loss model.
Impairment provisions would therefore be recognised on the inception of a loan, based on the probability of default and the typical loss arising on default.
"This differs from the current incurred loss model under IAS 39, where the requirement is that impairment provisions are only reflected when there is objective evidence of impairment," the Morses Club board explained.
"However, for home collected credit businesses, the application of IAS 39 was conceptually difficult as the nature of our product is that customers will, from time to time, miss a payment and, up to a level, we are comfortable with this.
"Indeed, we apply no additional charges associated with missed payments and are proud of this aspect of forbearance in our products."
Morses Club said it was therefore less definitive to term situations like that as an 'objective evidence of impairment', as an occasional missed payment did not necessarily indicate that recovery of a loan is at risk.
It said empirical evidence highlighted that loans with occasional missed payments often performed as well as loans with no missed payments.
"Under IAS 39, we decided that all loans with more than two payments missing in the last 12 weeks were to be provided for where there was an expected cash shortfall.
"For those loans with two payments or fewer missing in the last 13 weeks we still made an 'incurred but not reported' provision to recognise some of the loss risk associated with these loans.
"As such, under IAS 39 we chose to make some provision for loss against all loan cohorts."
The Morses Club board said that, whilst there were a number of detailed technical differences between IFRS 9 and IAS 39, in summary the impact to the company was primarily the effect of moving loans that were missing two or fewer payments in the last 13 weeks from an 'incurred but not reported' provision to the more onerous 'expected loss' model.
"We are well progressed with the methodology and accounting policies that we intend to apply to our loans under IFRS 9.
"For illustration, the estimated impact would have been a reduction of approximately 4% to 6% in the reported receivables as at February 2017.
"The directors of Morses Club believe this reflects Morses Club's prudent approach to calculating loan loss provisions."
As it is an accounting adjustment, the board said there would be no impact on the company's cash flows or the underlying profitability of its loans.
It would, however, delay the recognition of profit on a loan because of the higher impairment taken at the beginning of the loan.
The negative impact would therefore be more pronounced during periods of high growth.
"The movement in reserves is relatively small and will have no impact on our ability to pay a high proportion of our adjusted earnings as dividends.
"We can also confirm that the change to IFRS 9 does not have a material impact on our banking covenants where there remains significant headroom on the asset based covenants."