Joint approach forged on accounting for loan losses

THE INTERNATIONAL accounting standard setter has been warned it still has some way to go to finalise a new standard for losses on loans.

The IASB announced yesterday, with its US counterpart, that they now have a joint proposal for losses which means switching from a so-called incurred loss model to an expected loss model.

Standard setters are responding to complaints during the crisis that the incurred loss approach booked losses on open loan books far too late to be of any use to investors.

KPMG welcomed the joint announcement but added that there remained much work to complete before June this year, the IASB’s deadline. The changes come as part of the IASB’s review of the highly controversial standard IAS39.

Andrew Vials, leader of KPMG’s team on international standards, said: “While it is encouraging to see these important aspects of the impairment model re-exposed for comment, there are many other elements of the project which are still to be deliberated by the boards which may involve further changes to get to their final standards.

“These include impairment for assets that are not part of an open portfolio, the remaining aspects of measurement of impairment and interest recognition. There is still a great deal to do; the IASB faces a significant challenge to finalise the standard by 30 June 2011.”

In inviting comments on the new proposals, IASB chairman Sir David Tweedie said: “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 new proposals are open to public comment until 1 April.



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Fiona Westwood of Smith and Williamson.