TY - JOUR

T1 - The development of expected-loss methods of accounting for credit losses

T2 - A review with analysis of comment letters

AU - Hashim, Noor

AU - Li, Weijia

AU - O'Hanlon, John

PY - 2022/9/30

Y1 - 2022/9/30

N2 - After the financial crisis of the late 2000s, concern about delayed credit-loss recognition under the incurred-loss method prompted the FASB and the IASB to develop expected-loss methods. We review the development of these methods, including through comment-letter analysis. Initially, the FASB recommended immediate full recognition of expected losses, including at day one, and the IASB recommended spreading the recognition of initially-expected losses across time. After unsuccessful attempts to converge based on proposals that partly reflected initial recommendations of each board, the boards eventually adopted different methods. We report that U.S. respondents largely opposed the FASB's final method, which required day-one recognition of all expected losses, and that non-U.S. respondents largely supported the IASB's final method, which required day-one recognition of 12-month expected losses. Day-one loss was controversial and impeded convergence. Our comment-letter analysis suggests that a day-one-loss-free more forward-looking incurred-loss method might provide a route to a more converged solution.

AB - After the financial crisis of the late 2000s, concern about delayed credit-loss recognition under the incurred-loss method prompted the FASB and the IASB to develop expected-loss methods. We review the development of these methods, including through comment-letter analysis. Initially, the FASB recommended immediate full recognition of expected losses, including at day one, and the IASB recommended spreading the recognition of initially-expected losses across time. After unsuccessful attempts to converge based on proposals that partly reflected initial recommendations of each board, the boards eventually adopted different methods. We report that U.S. respondents largely opposed the FASB's final method, which required day-one recognition of all expected losses, and that non-U.S. respondents largely supported the IASB's final method, which required day-one recognition of 12-month expected losses. Day-one loss was controversial and impeded convergence. Our comment-letter analysis suggests that a day-one-loss-free more forward-looking incurred-loss method might provide a route to a more converged solution.

KW - financial instruments

KW - credit losses

KW - impairment

KW - expected loss

KW - incurred loss

U2 - 10.2308/HORIZONS-19-117

DO - 10.2308/HORIZONS-19-117

M3 - Journal article

VL - 36

SP - 71

EP - 102

JO - Accounting Horizons

JF - Accounting Horizons

SN - 0888-7993

IS - 3

ER -