The International Accounting Standards Board (IASB) has published an exposure draft on the amortised cost measurement and impairment of financial instruments, the second phase of a project to replace the controversial IAS 39 Financial Instruments.
The proposal uses an expected loss model, where anticipated losses are recognised throughout the life of financial assets measured at amortised cost.
This represents a change from current IFRS and US GAAP, which use incurred loss models.
Incurred loss models mean impaired loans are not written down until a trigger event has occurred. The global financial crisis led to criticism of these models as they can present an initial, over-optimistic assessment of no credit losses, followed by a large adjustment once a trigger event occurs.
The IASB said the expected loss model would avoid the front-loading of interest revenue before a loss event is identified and would better reflect lending decisions.
Under the proposals, a provision against credit losses would be built up over the life of the financial asset.
Extensive disclosure requirements would provide investors with an understanding of the loss estimates that an entity judges necessary.
IASB chairman David Tweedie said that although moving to a single impairment model significantly reduces complexity, the challenges of applying an expected loss approach should not be underestimated.
“For this reason the IASB will tread carefully and seek input from a broad range of interests before deciding how to proceed,” he said.
The IASB has received widespread acclaim for the unprecedented level of outreach activity it undertook during the first phase of its review of IAS 39. The board has said it will continue the same level of engagement during phase two.
The deadline for comments is 30 June 2010.