IASB and FASB Propose Common Solution for Impairment Accounting

The International Accounting Standards Board (IASB) and the US-based Financial Accounting Standards Board (FASB) have published for public comment proposals for accounting for impairment of financial assets such as loans managed in an open portfolio.

 

At present, International Financial Reporting Standards (IFRSs) and US generally accepted accounted principles (GAAP) account for credit losses using an incurred loss model, which requires evidence of a loss (known as a trigger event) before financial assets can be written down. The boards have proposed moving to an expected loss model that provides a more forward-looking approach to how credit losses are accounted for, which they believe better reflects the economics of lending decisions.

 

The proposals are published as a supplement to an exposure draft published by the IASB in November 2009, and a separate FASB exposure draft published in May 2010. Those exposure drafts outlined different methods to account for credit impairment. Since then, the boards have worked to align their approaches. In doing so, they have sought to take account of responses to the original exposure drafts and recommendations made by the Expert Advisory Panel (EAP), an external group of risk management experts tasked with considering the operational consequences of applying an expected loss model as well as responses to the FASB proposal.

 

 

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