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New Bad Loan Accounting Rules For UK Banks

by Jim ONeil on February 6, 2011

in uk loans news

On Monday, two entities that establish accounting standards announced their joint plan requiring banks to make earlier anticipations regarding loan losses. This should provide the financial institutions with more time to address resulting financial shortfalls. It represents a major shift in the process by which lending institutions account for their losses.

The U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) made the proposal jointly. IASB Chairman David Tweedie reported that during the financial crisis, one of the main complaints was that losses due to loans were recognized too late in the process to be effectively addressed. In many countries, banks currently must wait until receiving hard evidence of losses before writing down the value of the relevant financial assets.

FASB and IASB separately issued plans during the past year, which banks criticized as too complex to implement. The joint proposal significantly refines each of these plans. Leslie Seidman, FASB Chairman, said the group is interested in whether the new plan provides loss information in a more effective manner. It also wants to ensure that banks feel the new requirements are operationally feasible.

The new plan requires banks to be more predictive when it comes to losses. This will provide the institutions with additional time to obtain extra funding, avoiding reliance on taxpayers. The top 20 economies in the world have requested that FASB and IASB develop global accounting rules by the end of June 2011, a deadline the entities are finding challenging.

The European Financial Reporting Advisory Group and Britain’s Accounting Standards Board also announced some changes on Monday. Standard setters are being requested to overhaul their rulemaking process, considering broad economic effects of any new accounting standards. These two groups point to progress by the IASB in this area but see the challenge being how to systematically implement this requirement within the actual process.

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