KPMG Bares Observation on FASB’s and IASB’s Impairment Accounting Approach

Lucas Gilmore, “Big 4″ observer
February 18, 2011 /

Although the new impairment accounting proposals of the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) will largely impact the banks applying them to their open portfolios, there are still “elements” that the regulators need to add up to the list.

This is the general observation bared by KPMG in its analysis of the parallel proposals released by IASB and FASB on January 31, which adopt a new approach on credit losses accounting through the expected loss model.

The proposals mark the turning point from the incurred loss model used to account for credit losses through the International Financial Reporting Standards (IFRS) and the US generally accepted accounted principles (GAAP).

“While it is encouraging to see these important aspects of the impairment model re-exposed for comment, there are many other elements of the project that are still to be deliberated by the Boards and will need to be included in their final standards,” KPMG said in its report.

KPMG proposes to consider the impairment for assets that are not part of an open portfolio, measurement of impairment and interest recognition.

Commenting on the overview of the proposals, KPMG said criticisms are directed towards the challenges and costs associated with implementing the proposed impairment accounting.

KPMG also observes that the proposals’ aim of connecting the impairment to the entities’ internal credit risk management reduces the comparability between different reporters as it offers a scope “for significant judgment on how it is implemented.”

“Interested parties should take into consideration that the determination of impairment through the estimation of future cash flows is an inherently subjective area that requires a high degree of judgment, particularly for larger wholesale assets,” KPMG said.

In addition, the firm has observed that the guidance on measuring expected credit losses is limited, which may result in reduced comparability between entities.

According to KPMG, the proposed impairment accounting does not “specify whether the expected credit losses would be determined using probability-weighted outcomes or the most likely outcome” due to this limitation.

Overall, KPMG finds that the recognition of expected losses on the time-proportional method is more consistent with the IASB’s objective, while recognition of losses expected for the foreseeable future is more consistent with the FASB’s objective.

 

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