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March 7, 2013 12:19 pm
International accounting standard-setters have unveiled a fresh plan to force banks to set aside money earlier against lending losses, but their revisions failed to bridge a damaging transatlantic rift in this key area of financial regulation.
The International Accounting Standards Board also admitted that it was unlikely that its proposed new rules would be in force before 2016, allowing banks yet more breathing space to repair their balance sheets.
The London-based IASB sets the IFRS accounting rules followed by listed companies in the European Union, Canada, Australia, Brazil, Russia and other countries.
Its current mechanism for totting up losses on bad loans has been criticised for allowing banks to ignore the consequences of reckless lending for years and then get swamped by a sudden wave of losses.
At the behest of governments around the world, the IASB had been working with the organisation that sets US accounting norms – the Financial Accounting Standards Board – on a global reform of these “impairment” rules.
However, the two standard-setters are now pursuing different approaches, with the FASB preferring to recognise more losses upfront than the IASB, which argues that such a regime could discourage lending.
The model announced by the IASB on Thursday further solidified this dispute. It would involve IFRS banks setting aside a certain amount of money on all loans to reflect the likelihood of them going sour over a 12-month period.
More losses would be taken if credit quality “significantly” deteriorated. The IASB said this would trigger losses markedly earlier than the current “incurred loss” model that came in for vilification during the financial crisis.
Under the incurred loss model, banks tend to delay the pain of impairment losses until a borrower has come close to default, the IASB said.
The standard-setter said its latest “expected loss” model was simpler than its previous thinking and more in tune with the way banks managed their loan portfolios.
Hans Hoogervorst, IASB chairman, said: “We believe the model leads to a more timely recognition of credit losses. At the same time, it avoids excessive front-loading of losses.”
Tony Clifford, an Ernst & Young specialist on accounting for loans and other financial instruments, said the proposed change would probably lead to bigger credit loss provisions at many financial institutions.
“However, the increase in provision will vary by entity, and entities with shorter term and higher quality financial assets are less likely to be affected,” he added.
The IASB had been planning to implement the new impairment rules at the start of 2015 as part of a broader suite of financial instrument accounting reforms known as IFRS 9.
However, the deadline for comments on its latest proposal is July 5. Given that it usually leaves 18 months between the finalisation of a standard and its implementation, the 2015 goal is unlikely to be met.
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