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Accounting bodies agree bank loans impairment rule
December 15, 2011 / 5:10 PM / 6 years ago

Accounting bodies agree bank loans impairment rule

* Joint IASB-FASB agreement on basic impairment model-IASB

* Banks only to book 12-month losses initially

* Definition on booking lifetime loan losses also agreed

By Huw Jones

LONDON, Dec 15 (Reuters) - Global accounting rule setters have ended a deadlock over how to force banks to book losses on loans earlier, so that they have time to replenish capital cushions without calling on taxpayers.

Under the deal, all loans will start out in a first category, or bucket, where a bank must book losses on any cash flows it thinks it may not receive over the following 12 months.

During the financial crisis, regulators criticised the rules for not requiring lenders to make provisions for soured loans until the last minute, leaving governments to pick up the bill.

The International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) are reforming and aligning their rules to remedy this and make matters more transparent for investors and regulators.

They have been trying for months to forge a common approach and told Reuters on Thursday an agreement had reached.

“The majority of the board members overwhelmingly backed the revised basic impairment model,” an IASB spokeswoman said.

The model is a halfway house between the boards’ initially divergent approaches.

The FASB had wanted potential lifetime losses -- which would be far higher -- booked at the start. The IASB, whose rules are used in more than 100 countries, including in Europe, had wanted no first-day losses booked.

They agreed lifetime losses will be booked only if there has been “more than an insignificant deterioration in credit quality and the likelihood of default is such that it is at least reasonably possible contractual cash flows may not be fully recoverable”.

This will make for much earlier loss provisioning, well before a loan defaults.

The boards are expected to suggest indicators or “signposts” about where the line is drawn

The two boards will put out the revised joint proposal on impairment to public consultation in 2012, once remaining issues are agreed. It is likely to become effective in 2015.

It is the second leg of a root-and-branch reform of “fair value”, or mark-to-market, accounting which was also heavily criticised during the financial crisis for forcing banks into firesales of assets to help improve their capital ratios.

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