New Mandatory Accounting Standards
The London-based International Accounting Standards Board made final on Thursday a new rule that mandates banks outside the U.S. will have to report losses on bad loans more rapidly and increase their reserves for loan losses, according to the Wall Street Journal.
The past standard was for banks to wait until losses occurred before recording or reporting the loss, which many financial critics claims was too slow and helped to compound the damage of the financial crisis.
The Institute of Chartered Accountants in England and Wales estimates that banks will have to increase their loan-loss provisions by an average of 50 percent. Iain Coke, head of the organization’s financial-services faculty, told the WSJ that the new rule will have an immediate effect on operations. “This may make banks safer but may also make them more costly to run,” he told the source.
The new rule could potentially affect U.S. lenders and investors in a number of ways. For example, the source warns that it could soon become more difficult to compare U.S. banks and those outside the U.S.
The Financial Accounting Standards Board, who determines accounting practices for domestic banks, has also expressed interest in adopting an expected-loss approach similar to the International Accounting Standards Board’s model. However, the two organizations could not reach an agreement on how long banks should be allowed to book their loan losses.
Tony Clifford, a partner with Big Four accounting firm EY, told the source he was disappointed that a universal standard could not be drafted.
As new regulations come into effect, it is important that lenders credit analytics take into account any changes. Credit application software that draws from alternative data sources can help protect lenders from taking any action that violates new legislation.