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Asset Impairment Rulemaking Update

Peter J. Rivas
Jones Walker LLP - Washington Office

August 12, 2013

Previously published on August 8, 2013

International banks and auditors remain divided over the Financial Accounting Standards Board's ("FASB") and the International Accounting Standards Board's ("IASB") proposals on accounting for bad loans. At issue is the time frame over which financial institutions and other businesses would look to the future to determine how to establish loan loss reserves, and distinguishing between performing and nonperforming assets for reserve setting purposes.

The FASB's proposal would require banks and other businesses to assess all foreseeable information about the future and then establish loss reserves, irrespective of which assets are performing and which are non-performing. However, the IASB proposal differentiates between performing and nonperforming assets, and generally requires businesses to establish expected losses only against non-performing assets.

With respect to performing assets, the IASB proposal implements a 12-month forecasting period to determine what, if any, reserves should be set aside. For assets that show signs of deterioration, businesses would have to estimate the lifetime losses that could occur. The 12-month outlook concerns commentators because there is no conceptual basis or rationale behind such a time frame.

Like the FASB, the IASB requires banks and other businesses to recognize losses earlier by assessing information about the future, but the IASB's proposal distinguishes between performing assets and those assets that have exhibited signs of deterioration in establishing loss reserve parameters. Commentators and international accountants view the FASB's approach as requiring banks and other businesses to establish larger reserves compared to the IASB model, by requiring businesses to assess all foreseeable future events without a comprehensive review of an asset's condition. They argue that the FASB's failure to distinguish between performing and non-performing assets is overbroad and unreliable, potentially resulting in setting excessive loss reserves.

Financial institutions that report under International Financial Reporting Standards prefer the IASB's approach, as it is more "closely aligned to their credit risk management practices, and they believe that operationally, it's more realistic and reliable to measure lifetime expected losses only on items that have deteriorated in credit quality," stated IASB technical director Sue Lloyd.

Like many new regulatory standards, accountants are also concerned about the cost of the new proposal. "While we agree that the model is operational, but at least in the case of large banks, it is extremely expensive to be implemented, and I don't know how costly this will be for other firms outside of financial sector," said Alexsandro Broedel Lopes for the Group of Latin American Standard-Setters.

The FASB and the IASB meetings to discuss impairment proposals are ongoing. The inability of the two boards to produce a common proposal has frustrated international banks and regulators. Many respondents to the proposals have repeatedly called for the FASB and IASB to resolve their differences and set universal conventions. The FASB Chairman Russell Golden acknowledged concerns about differences between the two plans, stating "by far, all of our stakeholders-whether investors, preparers or auditors-are promoting convergence and asking us to work with the IASB to come to a converged solution here."


The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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