Accounting Standards Regulators Outline Proposals for Common Impairment Accounting of Financial Assets

Jack Humphrey, Regulatory journalist
January 31, 2011 /

The International Accounting Standards Board (IASB) and the US-based Financial Accounting Standards Board (FASB) have proposed parallel approaches to impairment accounting of financial assets supplementing previously published exposure drafts.

The proposals, open for public comment until April 1, 2011, will adopt a more forward-looking approach to credit losses accounting through the expected loss model, a transition from the incurred loss model used to account for credit losses through the International Financial Reporting Standards (IFRSs) and US generally accepted accounted principles (GAAP). The present model requires evidence of a loss (known as a trigger event) before financial assets can be written down.

The IASB and FASB said the expected loss model, a method of accounting for impairment of financial assets jointly proposed by the two regulators, would better reflect the economics of lending decisions.

“A major complaint in the financial crisis was that when loan losses were recognised, it was a case of ‘too little, too late’. Such a situation highlighted the need for a more-forward looking approach to loan losses to ensure provisions are made much earlier than before. The proposed move to an expected loss model will address this issue, in addition to aligning IFRSs and US GAAP,” said David Tweedie, Chairman of the IASB.

In November 2009 and May 2010, the IASB and FASB separately introduced exposure drafts outlining different methods for impairment accounting of financial assets. The new proposals published today are the product of their work to align the approaches in accounting for credit impairment.

Responses of the previous exposure drafts have been reflected in the new proposals, including recommendations of the Expert Advisory Panel, a group of risk management experts whose task is to consider the consequences of applying the expected loss model and the responses to FASB recommendations.

“We are keenly interested in whether investors think this revised approach provides relevant and timely information about credit losses, and whether reporting entities find the proposed requirements operational,” said Leslie Seidman, Chairman of the FASB.

 

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