IASB Floats Revised Proposals for Loan-Loss Provisioning

By Frank Byrt

In a March 7 press release, the International Accounting Standards Board (IASB) said it has issued a revised set of proposals for a model for recognizing credit losses on financial instruments that differs from one proposed by the Financial Accounting Standards Board (FASB).
The accounting rule makers had been working toward a uniform model to improve on the incurred loss approach to reporting expected credit losses under a convergence process.   
IASB said the exposure draft, Financial Instruments: Expected Credit Losses, builds on the expected credit loss model previously agreed to by IASB and FASB, "but it has been simplified to reflect feedback received from interested parties."  
That simplification is aimed at improving the timeliness of recognition of the expected credit losses, IASB said, and represents "a more forward-looking provisioning model.
"Financial reporting requirements both internationally and in the United States currently use an incurred loss model to determine when impairment is recognized on financial instruments," IASB said. "The incurred loss model requires that a loss event occurs before a provision can be made and was introduced to avoid the use of so-called 'big bath' general provisions that distorted the accurate reporting of financial performance to investors."
IASB said that during the financial crisis, the incurred loss model was criticized for delaying the recognition of losses and for not reflecting accurately credit losses that were expected to occur, hence the impetus for a revision.
Under IASB's model, "expected credit losses are recognized on all financial instruments within the scope of the proposals from when they are originated or purchased.
"Full lifetime expected credit losses are recognized when a financial instrument deteriorates significantly in credit quality," IASB said. "This is a significantly lower threshold than under the incurred loss model today, which in practice has resulted in provisioning only when financial assets are close to default."
According to the IASB proposal document, "recognition of credit losses would no longer be dependent on the entity first identifying a credit loss event. In addition, the range of information that an entity must consider when assessing credit risk and measuring expected credit losses would be broader."
"Our proposals are a simplified version of the expected credit loss approach that we originally jointly developed with the FASB," said Hans Hoogervorst, chairman of the IASB, in the press release. "We believe the model leads to a more timely recognition of credit losses. At the same time, it avoids excessive front-loading of losses, which we think would not properly reflect economic reality."
IASB and FASB have been working to develop a more forward-looking impairment model that reflects expected credit losses at the request of the Group of Twenty Finance Ministers and Central Bank Governors (G20), the Financial Crisis Advisory Group (FCAG), and others. 
The IASB proposal will be subject to public consultation for a period of 120 days, with the comment period closing on July 5, 2013.
FASB has separately published its own alternative expected credit loss model, Proposed Accounting Standards Update, Financial Instruments - Credit Losses (Subtopic 825-15), which is available for public comment through April 30. 
IASB's Exposure Draft is part of its project to replace IAS 39, Financial Instruments: Recognition and Measurement. The new requirements for impairment accounting will be added as a chapter to IFRS 9 Financial Instruments.
A high-level "Snapshot" summary of the proposals is available for downloadComment letters can be submitted on the IFRS website.

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