The beginning of the end for IAS 39 - Exposure Draft Proposing a New Approach to Accounting for Credit LossesAccounting Alert - November 2009 (Special update) |
The IASB’s exposure draft: Financial Instruments: Amortised Cost and Impairment, proposes a fundamentally new approach to accounting for credit losses to replace the existing “incurred loss” model. The global financial crisis has led to criticism of the incurred loss model for presenting an initial, overoptimistic assessment of no credit losses, which is then followed by a large adjustment later. Responding to requests by the G20 leaders and others, in June 2009 the IASB published a Request for Information on the practicalities of moving to an expected loss model. The responses were taken into account by the IASB in developing the exposure draft.
The proposed approach is designed to result in earlier loss recognition by taking into account future credit losses expected over the life of loans or other financial assets (an “expected-loss" approach) and not just after a loss event has been identified. Under this approach, an allowance for expected future losses is gradually built over the life of a financial asset by deducting a margin for future credit losses from gross interest revenue, even if no losses have yet been incurred. This avoids the front-loading of interest revenue that occurs today and is a better reflection of the lending decision. Therefore, under the proposals, a provision against credit losses would be built up over the life of the financial asset. Extensive disclosure requirements would provide investors with an understanding of the loss estimates that an entity judges necessary.
If adopted, implementation of the expected-loss approach is likely to be a significant undertaking for banks and other lending institutions where time is required to collect data and develop systems to apply the new approach.
Likely applicable date and transition
Comments are due to the IASB by 30 June 2010. The long comment period allows entities to consider the impacts of the proposals. During this time an Expert Advisory Panel will address how the proposals might be applied operationally, advise the IASB on further guidance that might be required, and will facilitate field testing of the proposals.
A standard is expected to be finalised by the end of 2010. Mandatory application will be 2013 or later. The New Zealand request for comment and the IASB’s exposure draft is available on the NZICA website. The FRSB is asking for comments by 1 June 2010.
Further information can be found in the IAS Plus Newsletter: Financial Instruments: Amortised Cost and Impairment
