Sense on Cents

Extend and pretend!!

What is that? In large measure, accounting practices for financial institutions in the United States promote practices which ‘extend’ the terms of the loan or asset while ‘pretending’ as to the real value of that loan or asset.

Regardless of what one thinks about the integrity of these business and accounting practices, the fact of the matter is they are prevalent in our financial industry today.

As I referenced in writing about the Financial Accounting Standards Board (FASB) yesterday, I believe this board felt emasculated in having the relaxation of the fair value mark-to-market rammed down its throat by Wall Street and Congress.

There is another accounting board which has a decidedly different take on the accounting of financial assets. Who might that be? Let me introduce you to the International Accounting Standards Board, otherwise known as the IASB.

In a recent draft, the IASB has put forth the premise that it believes financial assets should recognize losses on a much more timely basis. From the IASB website, we can access IASB Publishes Proposals on the Impairment of Financial Assets:

Responding to requests by the G20 leaders and others, in June 2009 the IASB published a Request for Information on the practicalities of moving to an expected loss model. The responses have been taken into account by the IASB in developing the exposure draft.

Under the proposals expected losses are recognised throughout the life of the loan (or other financial asset measured at amortised cost), and not just after a loss event has been identified. This would avoid the front-loading of interest revenue that occurs today before a loss event is identified, and would better reflect the lending decision. Therefore, under the proposals, a provision against credit losses would be built up over the life of the financial asset. Extensive disclosure requirements would provide investors with an understanding of the loss estimates that an entity judges necessary.

What does this mean? The IASB’s language flies right in the face of the FASB. The IASB is proposing that expected losses are recognized and formally acknowledged in financial statements in a much more timely fashion.

No more ‘extend and pretend’ but rather ‘recognize and reserve’ so that our kids and grandkids aren’t paying for the financial failings of this generation.

Thoughts, comments always welcome and appreciated.

LD

This entry was posted on Thursday, November 5th, 2009 at 3:15 PM and is filed under accounting, General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.