IASB proposal combats root cause of financial crisis

The international accounting rule maker said it will “tread carefully” when bringing out new accounting rules aimed at removing a root cause of the global financial crisis.

The International Accounting Standards Board (IASB) draft proposal, released moments ago, looks to inject more realism and less optimism in banking decisions when handing out loans.

In the lead up to the crisis, banks, in their accounting treatment, assumed loans would be repaid until news to the contrary emerged. Under the proposed model, impairments to loans are recognised throughout their life.

The IASB has set aside an eight month consultation period, reflecting the delicacy of the situation and the wide ranging change this new standard would usher in for the global financial system.

An expert advisory panel has also been assembled to look at the issue which, the board acknowledges, will face “significant practical challenges.”

Sir David Tweedie, IASB chairman, said the proposals would make accounting for loans simpler, but warned, “the challenges of applying an expected loss approach should not be underestimated”.

“For this reason the IASB will tread carefully and seek input from a broad range of interests before deciding how to proceed,” he said.

Andrew Vials, partner in accounting firm KPMG’s international standards group, said the proposal would represent a major change in current practice.

“They would represent a significant shift…in a controversial area and no doubt will attract much comment, he said.

“In light of the importance of these changes we applaud the longer eight-month comment period, which gives all constituents time to assess both the extent to which the proposals may bring improvement to financial reporting and the operational issues involved in implementation.”

Read the IASB draft standard: IASB publishes proposals on the impairment of financial assets