Attempts to finalise new accounting rules that would force banks to provision for expected losses on their loans could fall apart, after a meeting between the two major accounting standards boards ended in disagreement.
The Financial Accounting Standards Board, the US accounting body, and the International Accounting Standards Board have been pushing to jointly move to an accounting standard known as the “expected loss” model.
The new methodology would oblige banks to set aside more money for expected losses on their loans and assets, and is a key response by the accounting bodies to accusations that the current system – the so-called “incurred losses” model – allows financials to avoid facing up to reckless lending until it is too late.
The new model has also been one of the few areas of agreement between the two bodies, following attempts to converge their respective accounting standards.
But in a joint meeting on Wednesday, the two organisations outlined a different approach to developing future drafts of the expected loss approach to loan impairment. The FASB chose not to vote on the issuance of such a document.
“FASB staff has advised the board that pervasive questions have been raised in the US about the appropriate interpretation of the proposal,” Leslie Seidman, FASB chairman, said in a statement. Some people were concerned that the methodology might not reflect the right amount of risk in the loans, Ms Seidman suggested.
She added: “The FASB still strongly desires to achieve a converged standard with the IASB on impairment; however, we believe it is essential that we address the questions that have been raised in the US before moving forward.”
Under the “incurred loss” approach embedded in the world’s dominant accounting systems, banks currently need evidence that a loan or bond has soured before they set aside money to cover losses.
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