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
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
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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.