The International Accounting Standards Board (IASB) published for public comment a revised set of proposals for the impairment of financial instruments. The proposals build upon previous work to develop a more forward-looking provisioning model, which recognizes expected credit losses on a timely basis.

Financial reporting requirements both internationally and in the U.S. currently use an incurred loss model to determine when impairment is recognized on financial instruments. The incurred loss model requires that a loss event occurs before a provision can be made and was introduced to avoid the use of so-called ‘big bath’ general provisions that distorted the accurate reporting of financial performance to investors. However, during the financial crisis the incurred loss model was criticized for delaying the recognition of losses and for not reflecting accurately credit losses that were expected to occur.

The IASB said full lifetime expected credit losses are recognized when a financial instrument deteriorates significantly in credit quality. This is a significantly lower threshold than under the incurred loss model today which in practice has resulted in provisioning only when financial assets are close to default.

Hans Hoogervorst, chairman of the IASB commented, “Our proposals are a simplified version of the expected credit loss approach that we originally jointly developed with the FASB. We believe the model leads to a more timely recognition of credit losses. At the same time, it avoids excessive front-loading of losses, which we think would not properly reflect economic reality. We look forward to receiving feedback on these proposals and moving swiftly to finalize this important project, consistent with repeated requests of the G20.”

Expected Credit Losses will be subject to public consultation for a period of 120 days, with the comment period closing on July 5, 2013.

The read the entire IASB news release, click here.