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EU should endorse new accounting standards for banks' loss reporting, advisers say


Changes to the way in which banks will be expected to account for expected credit losses on their balance sheets from 2018 are "conducive to the European public good", according to an advisory committee.

However, the European Financial Reporting Advisory Group (EFRAG) said that it had relied on "limited quantitative assessments" when producing its preliminary recommendations (85-page / 958KB PDF), particularly in relation to a proposal to postpone the changes for insurance firms until a new standard for insurance contracts is confirmed. It has therefore asked firms including "those who oppose the deferral" to submit evidence of the potential impact of the changes on insurers before it publishes its final recommendations.

The final text of International Financial Reporting Standard (IFRS) 9 was issued by the London-based International Accounting Standards Board (IASB) in July 2014, and forms part of that body's response to the global financial crisis. Although due to take effect in 2018, IFRS 9 has not yet been endorsed by the European Commission. However, it expects to be in a position to confirm that it will implement the new standard in the second half of 2015.

The IFRS rules are designed as a common global standard to be used by listed companies when compiling their accounts, in order to make them understandable and easy to compare across international boundaries. More than 100 countries currently require or allow the use of IFRS, although the US is a notable exception. US companies instead use the US Generally Accepted Accounting Principles (US GAAP), which are overseen by the Financial Accounting Standards Board (FASB).

Once in force, IFRS 9 will replace most of the requirements of the current International Accounting Standard (IAS) 39 on recognition and measurement of financial instruments, which was issued in December 2003 and applies to accounting periods beginning on or after 1 January 2015. Amongst other provisions, it will require firms to account for expected credit losses at the point that they first recognise financial instruments, and to recognise full lifetime expected losses at an earlier stage.

Under IFRS 9, the 'impairment model' currently used by financial firms will change from 'incurred loss' to 'expected loss', requiring them to set aside sufficient capital to cover expected losses over the next 12 months. Additionally, they will be required to record lifetime expected losses if credit risks increase significantly. The new standard also makes changes to classification and measurement, hedge accounting and firms' 'own credit' risks.

In its report, EFRAG said that the new standard met "the qualitative characteristics of relevance, reliability, comparability and understandability required to support economic decisions and the assessment of stewardship" and was also conducive to "prudent accounting". It would also lead to higher quality financial reporting than the equivalent US standards in those areas where these were not already the same, and was an improvement over IAS 39 in all areas except for classification and measurement of financial assets where a clear conclusion could not be made.

Although the report noted that one-off costs connected with the implementation of the new standard were "likely to be significant", the benefits of the changes were "likely to outweigh the costs", EFRAG said.

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