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The EBF has consistently contributed to the work of the International Accounting Standards Board (IASB) with the aim of developing a principle-based model which differentiates between performing assets and those which no longer perform or have suffered significant credit deterioration.
While the details of the recently issued IASB consultation on the Expected Credit Losses model need to be reviewed carefully, the EBF considers the IASB approach a step in the right direction. Nevertheless, it is particularly crucial to ensure that it takes into consideration issues such as consistency with risk management practices and application to open portfolios. It is also important to ensure that the model is operational and that impairment allowances are meaningful for different portfolios in different jurisdictions.
“We are committed to a single set of high quality accounting standards”, declared Guido Ravoet, Chief Executive of the EBF, “particularly given the growing importance of comparability of financial statements and a level playing field at global level.”
The EBF, therefore, regrets that the Financial Accounting Standards Board (FASB) has abandoned a joint project and has decided to develop its own expected loss model instead of working with the IASB. The FASB model does not take into consideration the link to interest rate recognition, leading to full day one loss. In the FASB model, financial reporting would reflect only the dynamic of volumes in the loan portfolios, obscuring the information about credit deterioration and risk management.