Andrew Vials, KPMG’s global IFRS financial instruments leader, said: “The proposals are a step change in accounting for impairment and are likely to have a significant impact on banks and similar financial institutions.”
Accounting for impairment has been hotly debated by standard setters on both sides of the Atlantic. Regrettably, the initial commitment of the IASB and the FASB to work together on joint proposals ended last year. In December 2012, the FASB issued its own proposals, which are quite different from the IASB’s.
Andrew Vials 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.”
The IASB proposals introduce a new ‘expected loss’ impairment methodology that would reflect deterioration in the credit quality of financial assets such as loan portfolios. The proposed model would require recognition of lifetime expected credit losses for financial assets whose credit risk has deteriorated significantly since initial recognition and a 12-month expected loss allowance for other financial assets.
Chris Spall, partner in KPMG’s International Standards Group, continued: “Estimating impairment is an art, rather than a science, involving difficult judgements about whether loans will be paid as due and, if not, how much will be recovered and when. The proposed model widens the scope of these judgements. It introduces a new threshold for determining whether there has been a significant deterioration in credit quality – which in turn is used to assess whether a loan should have an allowance to cover losses in the next 12 months, or to cover all expected losses over its life. These new rules would give rise to challenges, as new judgements would have to be made by preparers, reviewed by auditors and understood by users of financial statements, including prudential and securities regulators.”
The new model would apply to financial assets that are recognised on the balance sheet, such as loans or bonds, and measured either at amortised cost or at fair value with gains and losses recognised in other comprehensive income. It would also apply to certain loan commitments and financial guarantees.
Chris Spall observed: “This is a welcome change because most banks’ credit systems treat these exposures in a similar way.”
The proposals would introduce extensive new disclosures.
Andrew Vials said: “Although focused relevant disclosures are essential for users to understand the entity’s exposure to credit risk and the critical judgements 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.”
Most banks are likely to see a significant impact, and would be likely to need additional systems and processes to collect the necessary information.
Spall encouraged companies, in particular banks, not to delay assessing the impact of the proposals on their business: “Credit risk is at the heart of a bank’s business and the proposed model is expected to have far-reaching implications for their credit systems and processes. Banks may face significant implementation issues.”
Corporates would also be affected, but the impact on short-term trade receivables is likely to be small.
The proposals are open for comment until 5 July 2013.
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