Even investors disagree on how to flag bad loans

Posted on 21. Oct, 2013 by in Uncategorized

Dollar symbolInvestors worldwide are split on how to account for credit impairments. In a recent study of investors’ preferences, some favored the Financial Accounting Standards Board’s (FASB) approach, but others think the model developed by the International Accounting Standards Board (IASB) is preferable.

As the article below points out, both approaches utilize the “expected loss” method where analysts “take a forward-looking view of credit impairments to draw out early warnings when a company begins to expect its loans may lead to losses. But they differ when it comes to mechanics with FASB providing more information upfront about expected losses over the life of a loan.

The vast majority of respondents, however, agreed that the FASB and IASB need to settle on one standard that would be effective under U.S. and international rules.

Even investors disagree on how to flag bad loans

By Tammy Whitehouse, Compliance Week

It’s not just the rule makers who are having trouble agreeing on the best way to account for credit impairments. Investors don’t agree on the best approach either.

The CFA Institute recently polled investors globally on whether they like the Financial Accounting Standards Board’s proposal for how to get better accounting for credit impairments, or whether they prefer the model established by the International Accounting Standards Board. Both proposals follow an “expected loss” approach, meaning they are meant to take a forward-looking view of credit impairments to draw out early warnings when a company begins to expect its loans may lead to losses. The mechanics and the income statement effects are different, however, with FASB’s model producing more upfront recognition of expected losses over the life of loans, even when they are fully performing at the outset.

The vast majority, 92 percent, of the CFA Institute members who participated in the survey agreed it would be a good idea for the two boards to ultimately settle on a single method that would be effective under both U.S. and international rules. Nearly half, or 46 percent, said they would prefer to see the boards adopt a fair value approach instead of an expected loss approach as FASB and IASB have developed. If they must swallow an expected loss approach, 47 prefer IASB’s model while 44 percent prefer FASB’s. Read more …

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