Expected-Loss-Based Accounting for Impairment of Financial Instruments: The FASB and IASB Proposals 2009-2016

63 Pages Posted: 2 Jul 2016

See all articles by Noor Hashim

Noor Hashim

Lancaster University Management School

Weijia Li

Lancaster University Management School

John O'Hanlon

Lancaster University Management School

Date Written: June 28, 2016

Abstract

The financial and banking crisis of the late 2000s prompted claims that the incurred-loss method for the recognition of credit-losses had caused undesirable delay in the recognition of credit-loss impairment. In the wake of the crisis, the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) worked towards the development of expected-loss-based methods of accounting for credit-loss impairment. Their work included an ultimately unsuccessful attempt to develop a converged FASB/IASB standard on credit-loss impairment. The FASB and IASB eventually developed their own separate expected-loss models to be included, respectively, in a 2016 FASB standard and in the IASB's 2014 final version of IFRS 9 Financial Instruments. The failure to achieve convergence on an issue of such high profile and materiality has generated some controversy, and it is claimed that it will impose significant costs on the preparers and users of the financial statements of banks. This paper examines the various sets of expected-loss-based proposals issued separately or jointly since 2009 by the FASB and the IASB. It describes and compares key features of the different approaches eventually developed by the two standard setters, referring to issues that arose in arriving at practically workable solutions and to issues that may have impeded FASB/IASB convergence. It also provides information indicative of the possible effect of differences between the two approaches.

Keywords: financial instruments, impairment, expected-loss, loan losses, IFRS 9

JEL Classification: M41, G21

Suggested Citation

Hashim, Noor and Li, Weijia and O'Hanlon, John F., Expected-Loss-Based Accounting for Impairment of Financial Instruments: The FASB and IASB Proposals 2009-2016 (June 28, 2016). Available at SSRN: https://ssrn.com/abstract=2803173 or http://dx.doi.org/10.2139/ssrn.2803173

Noor Hashim

Lancaster University Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Weijia Li

Lancaster University Management School ( email )

Lancaster University
Management School
Lancaster, LA1 4YX
United Kingdom
44 (0)1524 593135 (Phone)

John F. O'Hanlon (Contact Author)

Lancaster University Management School ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+44 1524 593631 (Phone)
+44 1524 847321 (Fax)

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