Banks pessimistic on financial instrument convergence

by Richard Crump

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08 Jan 2013

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International Accounting Standards Board

EFFORTS TO CONVERGE financial instrument accounting standards are expected to end in failure, a survey of global banks has found.

According to Deloitte's Third Global IFRS Banking Survey, disagreements between the IASB and FASB have knocked banks' confidence in their ability to converge financial instruments accounting standards.

The global and US standard setters have been working together to create an expected loss model that deals with the deterioration of financial assets and liabilities as part of a wider effort to pave the way for the US adoption of IFRS.

Under current and contentious rules governed by IFRS, a so-called "incurred loss" model is used which, critics argue, allows banks to pay out on unrealised profits by not forcing them to make adequate provision for loans that could go bad.

The project hit the buffers last year after the boards expressed different views about how to account for the impairment of financial instruments. FASB decided to pursue a current expected credit loss model that recognises losses up-front and distance itself from the IASB's so-called three-bucket approach.

"The differing views of the IASB and FASB on the expected loss model for impairment have resulted in banks being less confident that convergence can be achieved for measurement," the report said.

"If the boards do not converge, this will likely be cited as creating an unlevel playing field between the US and IFRS reporters."

The IASB and FASB both share the common concept of recognising expected credit losses based on a probability weighted assessment on contractual cash flows not expected to be recovered, and incorporating the time-value of money.

FASB's model applies this concept to all financial assets in the scope of the impairment model, but unlike the IASB would not create a separate measurement depending on what the credit quality is at a given time. In contrast, the IASB's model would apply a dual measurement approach with the impairment of some assets measured on the basis of expected lifetime losses, and others measured on losses expected over the next 12 months only.

The majority of respondents (69%) favoured the IASB approach, while 21% supported FASB's model. The remainder were neutral.

Supporters of the IASB's approach said it was conceptually superior, would reduce earnings volatility, and have a more favourable regulatory impact, while FASB's model would make for easier implementation and increase comparability.

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