The International Accounting Standards Board’s credit loss exposure draft differs from the model the Financial Action Standards Board has proposed in the U.S., but according to the World Council of Credit Unions, it is likely to result in similar losses.
While FASB’s proposed credit loss model would require credit unions to recognize losses expected over the lifetime of a loan or asset, the IASB’s approach would only require provisioning for 12 months’ worth of losses.
Nonetheless, the World Council said in its July 5 comment letter, the international credit union trade association said it questions the need to move from the current incurred loss standards to the expected loss model.
Not only did credit unions perform well in general during the recent financial crisis under the incurred loss model, but council Vice President and Chief Counsel Michael S. Edwards said in the letter the transition to an expected loss model could deplete capital to the point that some credit unions would be forced into Prompt Corrective Action by their regulators.
“We are concerned that a significant depletion of credit union regulatory capital could occur as part of a transition to an expected credit loss accounting methodology even though these credit unions’ underlying economic credit risk exposures would not have changed and their total amount of reserves and allowances held to protect the institution and its members against losses would not have changed as an economic matter,” Edwards said in the letter to the London-based IASB.
The World Council proposed the IASB modify its final version to retain the incurred loss approach, especially with respect to small, community financial institutions. Additionally, the council suggested the IASB could allow a transitional period for the phase-in of the new standard that would allow credit unions sufficient time to build up additional loan loss reserves.
Other alternative ideas floated by the World Council include not requiring the discounting of expected future cash flows at the credit-adjusted effective interest rate, and allowing regulators to establish their own credit loss methodologies for small financial institutions, especially for those in developing countries or with limited staff resources.
The IASB’s comment period on its proposed credit loss changes closed July 5. According to a statement Tuesday from Fitch Ratings, after IASB members agree upon a final draft, the standard would have to be implemented through European Union and other national legislation, which means the new accounting standards aren’t likely to be required for a few years.