The new requirements, which form part of the now-complete new standard on financial instrument accounting, IFRS 9, will provide more timely information about expected credit losses. But it should not be seen as a panacea, says
The new model focuses more on the level of credit losses expected in the future and allows for earlier recognition of losses than was previously possible under the IASB's standards. It introduces a three-stage approach to loan loss provisioning, based on on-going assessment of the level of credit risk.
"Increasing the accounting provisions will also reduce regulatory capital. Regulators have adjusted the reported accounting numbers since before the financial crisis to take account of some expected losses. However, the new standard will go further still in providing for expected losses. Banks will need to consider the impact of the new standard on their regulatory capital, taking into account the results of regulators' stress-testing and asset quality review exercises."
Iain continued: "It is important to remember that this accounting change will not change the cash flows of underlying loans. However, when combined with tougher regulatory capital requirements, it may force banks to hold more capital for the same risks. This may make banks safer but may also make them more costly to run."
The standard will have a wide-reaching impact beyond the financial services sector too.
After several years of trying to agree a joint solution with the
Nigel said: "While almost everybody has agreed that moving to a more forward-looking model would provide more useful information, it's been very difficult to agree on the precise details of the new accounting model. It is regrettable that the IASB and the FASB have been unable to agree on all aspects of their models, but ultimately it is more important that we finally have a standard in place that will provide global investors with more timely information about increases in credit risk and expected credit losses."
The loan loss provisioning changes complete the three phases of the longstanding project to replace the IASB's much-maligned financial instruments accounting standard, IAS 39. IFRS 9 is mandatory from
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