Easy Does It – Credit Losses

ICAEW has in a letter to the US accounting standards setter, the FASB, highlighted its serious concerns about the FASB’s proposed new accounting standard for expected credit losses.

Dr Nigel Sleigh-Johnson, Head of ICAEW’s Financial Reporting Faculty, said:

Dr Nigel Sleigh-Johnson, Head of Financial Reporting Faculty ICAEW
Dr Nigel Sleigh-Johnson, Head of Financial Reporting Faculty ICAEW

The proposed model could have serious commercial and broader economic consequences, as it could change the incentives of lending and encourage more short-term loans and commitments.

It is questionable whether the FASB’s suggestion that all expected credit losses be recognised on the day a loan agreement is signed meets the objectives of financial reporting. Such an approach does not in our view reflect commercial lending practice and could result in information that is unclear to users of financial statements. We hope that the FASB will reconsider its position and bring it more in line with the proposals issued by the IASB

According to ICAEW, a future standard for expected credit losses must balance having a sound conceptual basis with being practical to apply. It should also be suitable for all types of businesses, not just those in the financial sector; treat performing and non-performing loans differently; incorporate a broad range of credit information; and be consistent with the initial recognition of financial assets at fair value.

Nigel commented:

Overall, the IASB’s impairment proposal, whilst not impeccable, meets these criteria and offers a solution that is both operationally viable and a potential improvement to existing loan loss recognition practice.

The IASB should finalise its standard as quickly as possible, as this is a critically important international financial reporting issue. Any further delay would be very hard to justify.