Guest Opinion: New ALL Standards Are Coming
In case you’ve missed it, significant efforts are currently underway to align U.S. accounting practices with standards that are followed in other parts of the world (the convergence process). To accomplish this monumental task, the U.S.-based Financial Accounting Standards Board is working closely with the International Accounting Standards Board. The IASB and FASB met in mid-December 2011 and reached tentative conclusions concerning new methods to account for the allowance for loan losses. These new methods will result in significant changes to current practice, and, in my opinion, will create even more complexity, confusion and diversity in practice compared with current accounting standards.
The boards outlined an approach whereby all loans would be categorized into three different buckets, with each receiving unique accounting treatment. The three buckets are explained in the accompanying table with a comparison to current accounting practices required under GAAP.
To illustrate the impact of the reasonably possible criteria, consider a portfolio of first trust deed loans in the sand states that were underwritten to secondary market conditions and, at the time of underwriting, had loan-to-value ratios of less than 80%. Today, assume there is a large segment of this portfolio with LTVs above 140%.