Four years ago the G20 leaders called for improvements to the way financial instruments are accounted for – the IASB has now responded with guidance different to the US standard setter.
Dr Nigel Sleigh-Johnson, Head of ICAEW’s Financial Reporting Faculty, said:
“In an ideal world, the IASB and the FASB would agreed on one impairment standard. Despite several consultations and much deliberation, that has proved impossible. We need to accept that it is now much more important to focus on finalising a quality solution for IFRS reporters.”
Both the IASB and the FASB are moving from an incurred loss model to an expected loss model based on the assumption that this will help prevent future financial crises. However, the two boards have differing views on when expected losses should be recognised. The FASB’s proposal supports upfront recognition of lifetime day one losses, while the IASB believes that the recognition of such losses would not normally reflect economic reality.
“There is little evidence to suggest that the incurred model had any significant role to play in the crisis nor that an expected loss model will prevent future crises. It is important to be realistic; this is not going to be the panacea. There are potential pitfalls linked to any model, including expected loss models; the proposals could, for example, increase the potential for profit smoothing.
“The current FASB proposals may be easier to apply from an operational perspective, but recognising losses on day one may, in some circumstances, have a negative impact on banks’ willingness to lend money. Banks don’t generally expect to lose money when they make loans on market terms so the IASB is right not to recognise such lifetime losses on day one of the loan.
“Importantly, the IASB’s latest proposals also appear at first glance to be more operational in practice, and are therefore an improvement on previous iterations. However, it will take time to fully assess the likely practical implications.”
The impairment proposals will ultimately form part of the IASB’s new financial instruments accounting standard, IFRS 9.