The American Bankers Association recently expressed support for a proposal on accounting for credit losses but said that further work is necessary to ensure that the model accurately reflects how banks manage credit risk.
The Financial Accounting Standards Board’s proposal would require firms to book extra losses from held bonds and loans on balance sheets sooner than required at present, which could bring significant changes to the way chief financial officers, bank finance directors and accounting heads manage their balance sheets.
“We appreciate FASB’s commitment to improving impairment accounting and addressing concerns expressed by bankers, investors and regulators about previous models considered by FASB and [the International Accounting Standards Board],” Bob Davis, the executive vice president for mortgage markets, financial management and public policy at the ABA, said. “By its nature, impairment accounting for loans and securities involves significant judgment, making it vital that the standard is clear and reflects how credit risks are managed.”
Under the proposal, a firm’s balance sheet would reflect the current estimate of expected credit losses at the time of the firm’s reporting date, and the company’s income statement would also reflect how much a financial instrument may have declined in the most recent quarter or year.
“The proposal appears to require banks to extend some estimates of losses so far into the future that reliability will likely be called into question,” Davis said. “The model’s applicability to many debt securities also must be explored in more detail. We believe a better reflection of estimable losses would provide improved information to the investment community and regulators.”