The IASB in cooperation with the FASB published for public comment proposals for accounting for impairment of financial assets such as loans managed in an open portfolio. The supplementary document is open for public comment until 1 April 2011 and can be accessed via the IASB and FASB websites.
At present, IFRSs and US GAAP account for credit losses using an incurred loss model, which requires evidence of a loss (known as a trigger event) before financial assets can be written down. The boards have proposed moving to an expected loss model that provides a more forward-looking approach to how credit losses are accounted for, which they believe better reflects the economics of lending decisions.
The proposals are published as a supplement to an exposure draft published by the IASB in November 2009, and a separate FASB exposure draft published in May 2010. Those exposure drafts outlined different methods to account for credit impairment. Since then, the boards have worked to align their approaches. In doing so, they have sought to take account of responses to the original exposure drafts and recommendations made by the Expert Advisory Panel (EAP), an external group of risk management experts tasked with considering the operational consequences of applying an expected loss model as well as responses to the FASB proposal.
Sir David Tweedie, Chairman of the IASB, commented: "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."
Leslie F Seidman, Chairman of the FASB, said: "The FASB and IASB have heard the urgent call for an improved, converged approach to impairment of debt instruments. 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."
Press release
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