Financial impairment proposals will increase costs

The International Accounting Standards Board’s (IASB) proposals for the impairment of financial instruments will add to the disclosure overload and will have significant cost implications for many preparers and users, say top firms.

There has been mixed response to the long-awaited revised proposals on accounting for impairment of loans and other financial assets as it morphs into an expected loss model. At the same time the IASB’s decision to proceed independently of the US regulator, Financial Accounting Standards Board (FASB) and issue a virtually concurrent consultation is causing concern.

Andrew Vials, KPMG global IFRS financial instruments leader, said: ‘This is a big disappointment. The boards have indicated that they plan to discuss jointly the comments received on their respective proposals and we encourage them to do so with the aim of arriving at a single solution.

‘However, the deadlines for providing responses to the exposure drafts are different, making it difficult for constituents to give informed feedback based on full consideration of both models.

‘Although focused relevant disclosures are essential for users to understand the entity’s exposure to credit risk and the critical judgments that it has made in preparing the accounts, some will see the proposals as adding to the perceived “disclosure overload” that troubles many preparers and users.’

Meanwhile, Nigel Sleigh-Johnson, head of the ICAEW’s financial reporting faculty, warns that there may be problems given the two boards’ differing views on when expected losses should be recognised.

‘There is little evidence to suggest that the incurred model had any significant role to play in the [financial] crisis nor that an expected loss model will prevent future crises,’ he said. ‘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.’

Andrew Spooner, lead IFRS financial instruments partner at Deloitte, said he expected the transition costs in implementing the new model to be ‘significant’.

‘While the G20 has called upon global standard setters to establish a single set of international accounting rules on impairment, there are still technical differences between the IASB’s and the FASB’s proposals.

‘In spite of earlier efforts by both to produce common rules, the proposals differ which could lead to material differences in the numbers if the current proposals are adopted. This could have unintentional capital implications. We expect the transition costs in implementing the new model to be significant, particularly for banks.’

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

The IASB project team will host an interactive webcast on the proposals at 10am GMT on 13 March 2013. To register, click HERE

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