‘If this is going to unravel…’ | FT Alphaville

‘If this is going to unravel…’

Oh, those international accounting standard-setters. Such drama queens.

On Wednesday, the International Accounting Standards Board (IASB) and its US counterpart, the Financial Accounting Standards Board (FASB), held a joint meeting to discuss impairment.

We’ll save you the suspense. It ended in tears.

While the fate of accounting methods for impairment of loans and financial assets might seem like a boring topic in the midst of bank earnings week, it really gets to the heart of the financial crisis.

At the moment banks use an incurred loss method in calculating how much money they need to set aside for bad loans. Critics have accused the methodology for giving banks too much leeway – so much, in fact, that they have nasty tendency not to provision for bad loans until it’s too late.

In response, IASB and FASB have focused on developing an expected loss model which would force the banks to set aside money for anticipated losses – i.e. before the loans actually start to sour.

But Wednesday’s meeting ended with FASB shying away from the proposal.

FASB chairman Leslie Seidman told Hans Hoogervorst, head of IASB, that she wanted to do more due diligence on the new proposal following feedback from various interested parties.

Here’s a rough transcript of the exchange that followed:

HH: Leslie, I’m a bit confused here. This is the first time that we have a joint project where we get a whole list of unanswered questions that your staff is going to address with constituents again. My feeling is that many of these questions go to the core of the joint decisions that we have been taking. I’m very much concerned that this could lead, for the fourth time I think, to a reopening of this whole discussion. I hope that you can tell me that such is not the case.

LS: [very poor audio quality in this section, so may not be word-for-word correct]. Well first of all there’s two categories of issues. The first category is the remaining technical issues we have previously indicated that we have to deal with. The second [category of] issues relate to the feedback that we’ve received. As you know in the past we had identified the need to develop application guidance to amplify or better explain the principle of expected loss that we had both agreed upon, and in the iterative process of going through the drafts of the application guidance with our stakeholders we’re continuing to hear confusion and in some cases concern about the intent of the boards and how those pieces of guidance would be applied. So as Steve [FASB project manager] said, this is our belief that, in response to the feedback that we have received, in order for us to move forward confidently that the exposure draft is going to represent an understandable operational improvement in financial reporting, we believe we need to address these issues now. Our plan is to do that as expeditiously as we can, so that we can move forward to exposure draft on approximately the same timetable that we had laid out previously. We do have some flexibility in the schedule for the summer and so we would hope to work through these issues as quickly as possible so as to stay on track.

HH: Leslie, I just want to say that I’ve just revisited the history of this project. Both boards have been working on this since the beginning of 2009. Both boards have made three attempts at solving this project, two of which were joint attempts, and we have one lying ahead of us now. These were very difficult decisions and we were very happy that we finally reached, on all of the major issues, convergence in May of this year. And I am very worried that what your staff has now just indicated is that the whole thing is going to unravel again. And if you go to your constituents with the message “oh, we’re so unsure, we’re so unsure” then yes, you’re going to get a lot of additional confusion I’m sure. I would also like to say that, if this is going to unravel, I find it for us as standard setters, not just us but also for you, I think it is deeply embarrassing. That in three efforts, in which we have looked at at least ten alternatives, in which we have left no stone unturned, that after three years we are still not able to come up with an answer. I would really find that unacceptable. So I would really hope that when your staff does this outreach they do it with an attitude of getting things fixed and not to let it unravel.

LS: Hans in response to that I would say that as standard setters our due process procedures are to discuss our evolving conclusions with stakeholders and make sure that they perceive it as an improvement in financial reporting, and that they can understand it… and the message I would send to those stakeholders is that we have heard the widespread confusion and questions and we plan to address them before we move forward with an exposure draft. I think the time we will take over the next couple of months to bring clarity to this situation will end up with a more efficient process than were we to go out with an ED now, as desirable as that might be, with a clear understanding now of the feedback that we expect to hear. Our desire here is very much still to try and reach as converged solution here as quickly as we can but in light of the very basic feedback we have heard we feel it is our responsibility to address this.

HH: Well I would just like to remind you that when our colleagues the prudential regulators, who created Basel 3 I think two years ago, when they came to their final conclusions they had the whole banking industry kicking and screaming telling them that the whole thing would go under. I don’t hear that now from our constituents. We still hear questions but none of them are such questions that we have a feeling that we are completely on a dead end street. All I want to say that at some point you have to come to conclusions, and if we are not able to come to conclusions after three attempts, and need yet another attempt in which I cannot think of any alternatives that we have not looked at yet, then we really have done our job very poorly.


Related links:
Accounting bodies fail to agree loan standard – FT
FASB splits with IASB on impairment standards – Accounting Today