Proposed expected credit losses rules for financial assets is a move towards simplified forward looking approach – Deloitte

13 March 2013 - Investment in IT capabilities may be required by financial services entities

The International Accounting Standards Board (IASB) has issued its long awaited proposals on expected credit losses rules for financial assets.

John McCarroll, Partner at Deloitte, commented:

 “This announcement represents a very significant change from the existing “incurred loss” model in IAS 39. The proposals in the exposure draft result in lifetime expected losses being recognised as the credit risk and quality of a financial instrument deteriorates as opposed to when a credit event occurs. This is intended to be a simpler approach than the original 2009 proposals and more closely follows the operational and risk management systems at financial institutions.

“The proposals, if finalised, will have the greatest impact on those entities that have their financial assets or commitments to extend credits not accounted for at fair value through profit or loss. There will be a significant impact on banks and other financial institutions. Entities may need to upgrade their information technology capabilities to ensure that robust sources of data are available to support their estimates of credit losses as well as providing information for the required disclosures.”

Goind Ram Khatri, Senior Manager at Deloitte commented further:

“The proposed expected losses model is more forward looking and considers a broader range of information than the existing incurred loss model and, as such, adoption of the proposed rules would be a challenge for many entities that will impact not only finance, but also would require involvement of and integration between risk management, corporate reporting and investor relations.

“The proposed rules, if finalised, are expected to be effective for accounting periods beginning on or after 1 January 2015, subject to EU endorsement. Although this is some way off, the effect of the new requirements will need to be planned for in terms of processes and controls and analysing the impact on the resulting numbers.”  

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