Irish banks could report expected losses to boost confidence

IRISH BANKS might be forced to account for expected losses rather than following current International Financial Reporting Standards that only call for incurred losses to be booked.

The debate over expected versus incurred losses has been raging for some time, and the architects of the Irish plan said the move will build confidence in the beleaguered banking sector, the Irish Independent reported.

Reporting loan losses now for debts that banks know might cause problems in the future could help convince the market that they take their fiduciary responsibilities seriously, according to officials at the Central Bank. It might also avoid the erosion of confidence that a steady stream of bad news could bring, by presenting potential losses upfront in a ‘big bang’ approach to accounting.

Currently, banks are only expected to report incurred losses. Critics said this allows for non-prudent accounting and contributed to the credit crisis.

Accounting expert Tim Bush said: “Under the old rules, if the bank lent £100,000 to someone, they’d make a risk assessment of how much they were likely to get back and make an provision for that. Under the new rules, you don’t make those provisions until the loans actually start going bad.”

The International Accounting Standards Board is currently examining IFRS 9 – which covers provisioning for loan losses – with a view to moving from an incurred to an expected loss model. Two consultation documents have been published, the second in collaboration with the US Financial Accounting Standards Board, making it seem likely the move will occur.

The IASB refused to comment on the Central Bank’s proposal.

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Fiona Westwood of Smith and Williamson.