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Consultation Paper on Expected Loss Model for Banks Issued

To prepare banks for the adoption of the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board’s (“IASB”) standards for writing down assets, the Basel Committee on Banking Supervision (“the Basel Committee”) has proposed guidance discussing its expectations for bank risk management procedures. Issued on Monday, the consultation paper outlines what is expected from banks for credit risk practices once they implement IASB’s July 2014-issued International Financial Reporting Standards (IFRS) 9, Financial Instruments, and FASB’s upcoming standard based on proposed Accounting Standards Update No. 2012-260, Financial Instruments—Credit Losses (Subtopic 825-15). The accounting boards’ standards provide new requirements for banks to write down bad loans on balance sheets in what is being termed as an expected credit loss model.

Featuring 11 core principles, the consultation paper focuses on reviewing and measuring the accounting for expected credit losses, as well as the credit risk for unresolved losses in which reserves must be set aside under the new model. Further, the expected-loss model shows a drop in asset value earlier than the soon-to-be replaced incurred-loss model. The Basel Committee says banks cannot rely solely on existing conditions and past data, but rather need to assess and measure progressive information and macroeconomic influences. Additionally, after the 2008 financial crisis, the decades-old incurred-loss model was heavily criticized for allowing banks to hold off on writing down their assets. Ensuring banks react more quickly to economic downturns or shake-ups, IFRS 9 has applied an expected-loss model for writing down assets.

Comments on the consultation paper are due by April 30th. In the meantime, accounting experts from the Basel Committee are expected to discuss the consultation paper with members of the International Banking Federation later this month.

Need assistance with IFRS and the latest Accounting Standards Updates? Cherry Bekaert’s Financial Services Group is available to help.