The Federation of European
Accountants (Fédération des Experts Comptables Européens – FEE) has
attempted to define technical jargon used by policy makers, banks,
regulators and accountants regarding bank provisioning and
FEE said the paper, Bank Provisioning and
Reserving: A Comparison of Alternatives, is important because there
is no common understanding of what many terms that have arisen out
of the financial crisis mean.
The 32-page document is intended to help
readers better understand discussions surrounding proposals made by
the International Accounting Standards Board (IASB) for the
impairment of financial assets.
It also complements a policy paper on the
expected loss model for impairment of financial assets that was
published by FEE and the European Financial Reporting Advisory
Group in December.
FEE notes that during the global debate over
how to prevent a repeat of the current financial crisis, a number
of new terms related to provisioning and impairment have entered
the day-to-day vocabulary of policy makers, bankers and
The federation said there does not yet seem to
be a common understanding of what these terms mean, or what their
potential effects on pro-cyclicality, the reliability of
information produced by banks, and the role played by banks in the
global economy might be.
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The paper focuses on three concepts:
• Impairment, which is the reduction in the
recoverable amount of an asset and is reflected through the income
• Provision, which is the difference that
indirectly adjusts the contractual value of an asset to its
recoverable amount and is reflected through the income statement;
• Reserves, which are different categories of
equity on the balance sheet that
have restricted distribution to shareholders.
New terms that have entered the
day-to-day vocabulary of policy makers, bankers and accountants
• Incurred and expected losses;
• Expected cash flows;
• Dynamic provisioning;
• Fair value; and
• Economic cycle reserves.