In the continued march towards convergence, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) have hit another roadblock. Both boards have issued proposals surrounding the recognition of credit losses on financial instruments, resulting in two very different interpretations.
FASB’s proposal, which was issued on December 20, 2012, requires an entity to record its current estimate of expected credit losses every period. Peter Putnam, CFO of Credit Union of Southern California, stated that this proposal violates the matching principle of accrual accounting, since it requires expected future loan losses to be recorded immediately. The deadline for comments was extended to May 31, as many organizations are expressing concerns over this proposal.
IASB’s model, which was issued on March 7, 2013, has also come under scrutiny, as an entity would record a portion of the expected losses, until significant credit deterioration has occurred. When the entity incurs significant credit deterioration, the full estimate of expected credit losses would be recognized. Organizations are concerned that this proposal fails to address issues surrounding delayed recognition of credit losses in the United States.
IASB Chairman Hans Hoogervorst stated his desire to move quickly in convergence efforts relating to these proposals; however, due to heavy criticism of each proposal, no resolution appears to be in sight.
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