Accountants Propose New Approach to Accounting for Credit Losses

The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) intend to publish later this month a proposed joint approach on credit impairment of loans and other financial assets managed in an open portfolio.

 

Accounting for credit losses is one of the most important aspects of accounting for financial instruments. Their accounting treatment determines how non-performing loans that are measured under amortised cost should be impaired. Both International Financial Reporting Standards and US generally accepted accounting principles currently apply an ‘incurred loss’ approach to loan loss provisions, whereby specific evidence of a loss is required before a loan can be impaired. This approach was criticised during the recent financial crisis for preventing entities from accounting for expected losses early enough.

 

The IASB and the FASB originally published separate proposals on credit impairment of financial assets. Although both boards proposed moving to a more forward-looking approach to accounting for impairment they proposed different models.

 

Following intensive joint discussion of the responses each board received on its original proposals the boards will shortly seek views on a common approach that incorporates elements of each of their original models. The Boards will also conduct extensive outreach with constituents about the operationality of the proposal and usefulness of the resulting information.

 

The boards will propose an impairment model based on accounting for expected losses. This approach provides a more forward looking approach to accounting for credit losses. It builds on the work of the Expert Advisory Panel, an external group comprising risk management experts that was set up to consider how to address the operational difficulties of applying an expected loss model.

 

The proposals respond to requests by the Group of 20 (G20) Leaders, the Financial Stability Board, the Basel Committee on Banking Supervision and others for the IASB and the FASB to reach a common solution for impairment accounting.

 

 

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