The International Accounting
Standards Board (IASB) should provide two separate lines on loan
loss provisions in financial statements to avoid a trade off
between investor and regulator needs, the UK Financial Services
Authority (FSA) chairman Adair Turner said.

Turner was speaking at an Institute of
Chartered Accountants in England and Wales event that was
discussing whether banks are different from other companies and, if
so, need different accounting, governance and auditing.

The suggested the two line model was met with
scepticism by some senior accountants, who said after the event
that it is unrealistic and would add to complexity.

International accounting standards currently
apply an incurred loss approach to loan loss provisioning. IASB
proposals for a revamped standard replace incurred loss with an
expected loss model.

Turner said the expected loss approach has
merit, but “the devil is very much in the details”.

He explained most prudential regulators would
prefer expected loss, calculated through judgments based on past
experience, or by formulae that link provisions to broad indicators
of likely future credit problems.

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However, he said some investors may be
concerned about whether such judgments are based on fact and are
transparent and understandable.

He proposed that to avoid facing a trade off
between investor and regulator needs, the IASB could provide two
separate lines on loan loss provisions in financial statements:

• The existing line, based on already incurred
events; and

• A second line, based either on a formula or
on management judgements that have been challenged by regulators
and include disclosures of the rationale behind the judgement.

UK Financial Reporting Council chief executive
Stephen Haddrill was also concerned about the IASB’s proposed loan
loss provisions fix.

He said serious modelling of the standard’s
impact must be applied before a decision is made and that one
particular question that needs asking is whether an expected loss
model would make volatility go away, or just make it happen

The IASB’s provisioning proposals form part of
its exposure draft on the amortised cost and impairment of
financial instruments. The draft represents the second stage of the
board’s review of IAS 39 Financial Instruments: Recognition and

In November, the European Commission decided
not to fast-track endorsement of the first stage of the IAS 39
review. While few were surprised by the decision, some questioned
whether this indicated a lack of support for the IASB in

Haddrill said that in hindsight, the delay
will probably not be a bad thing.

“Let’s take the time the EC has given to us to
make the right changes,” he said.

One change Haddrill would like to see to bank
accounting is strategy outlined in the front end of accounts. He
said this could also introduce more responsibilities for

“Their job at the moment is to see that the
front and back match, but maybe they should challenge the front end
more,” he said.

The same but different

Turner said banks are different from
other public interest entities because they carry more leverage,
carry more risk and are of systematic importance.

Charged with speaking from the perspective of
the audit profession, PricewaterhouseCoopers UK head of public
policy and regulatory affairs Pauline Wallace was adamant there
should still be a single framework for accounting and auditing.

“There is clear evidence from investors that
they want a single set of standards when it comes to audit,
accounting and even ethics,” she said.