IASB consults on proposals for financial impairment

The International Accounting Standards Board (IASB) has issued proposals for the impairment of financial instruments for public consultation.

The financial instrument proposals build on previous work to develop a more forward-looking provisioning model, which recognises expected credit losses on a more timely basis, but has met with some criticism.

Following months of discussion and feedback, the IASB has issued proposals independently of the US, which is pursuing a different solution. The IASB said that the proposals ‘build upon the expected credit loss model previously agreed between the IASB and the FASB, but it has been simplified to reflect feedback from interested parties’. The US Financial Accounting Standards Board (FASB) has published a separate cinsultation proposing an alternative expected credit loss model. The two sets of proposals have overlapping comment periods.

Financial reporting requirements both internationally and in the US currently use an incurred loss model to determine when impairment is recognised on financial instruments. The incurred loss model requires that a loss event occurs before a provision can be made and was introduced to avoid the use of so-called ‘big bath’ general provisions that distorted the accurate reporting of financial performance to investors. However, during the financial crisis the incurred loss model was criticised for delaying the recognition of losses and for not reflecting accurately credit losses that were expected to occur.

Consistent with G20 demands, the Financial Crisis Advisory Group (FCAG), the IASB and FASB have been working jointly to develop a more forward-looking impairment model that reflects expected credit losses.

Hans Hoogervorst, IASB chairman, said: ‘Our proposals are a simplified version of the expected credit loss approach that we originally jointly developed with the FASB. We believe the model leads to a more timely recognition of credit losses. At the same time, it avoids excessive front-loading of losses, which we think would not properly reflect economic reality.’

The 120-day consultation period on Exposure Draft Financial Instruments: Expected Credit Losses will close on 5 July 2013.

The project team will host an interactive webcast to introduce the proposals at 10am GMT on 13 March 2013. The webcast will be repeated at 2pm on the same day. To register for the webcast, click HERE

For reaction to the IASB proposals, read the latest news coverage HERE

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