Banks face an overhaul of international rules for measuring losses on loans, derivatives and other assets as regulators seek to prevent a recurrence of the fire sales seen in the last financial crisis.
The International Accounting Standards Board published revised standards for lenders and other companies today with a January 2018 deadline for implementation. IASB rules are mandatory for publicly traded companies in over 100 countries, though not the U.S., which applies its own.
The revised standards will force businesses to make a more realistic, ongoing assessment of losses they have suffered on financial products, curbing the potential for so-called cliff effects, whereby they suddenly have to make large writedowns, the IASB said. The measures are "much needed improvements," said Hans Hoogervorst, the IASB's chairman.
Accounting standard-setters have been in the firing line since the crisis erupted in 2008, amid concerns that their rules fueled the financial turmoil that saw the collapse of Lehman Brothers Holdings Inc. and paralyzed the global banking system.
"We expect the new model will increase the loan loss provisions on banks' balance sheets by about 50 percent on average, although this will vary substantially between institutions," Iain Coke, head of financial services at the Institute of Chartered Accountants in England and Wales, said in an e-mailed statement.
"It will reduce profits in the year of implementation, but it may not have a major impact on the income statement in future years," Coke said.
A European Commission-sponsored group led by Jacques de Larosiere, a former head of the International Monetary Fund, found that accounting rules "helped trigger a negative feedback loop amplified by major impacts in the credit markets."
Accounting standards "were systematically biased toward short-term performance," the group said in a 2009 report. Banks were allowed to recognize profits straight away while delaying recognition of losses, the group said.
The IASB said today that it has completed work on overhauling and replacing the key accounting standard implicated in the crisis, IAS 39.
The new measure, IFRS 9, "requires an entity to recognize expected credit losses at all times," meaning that "it is no longer necessary for a trigger event to have occurred before credit losses are recognized."
Still, the IASB acknowledged defeat in a bid to bring the U.S. within the scope of the updated standard.
"The IASB has worked closely with the FASB throughout the development of IFRS 9," the group said, in reference to the U.S. Federal Accounting Standards Board. "Although every effort has been made to come to a converged solution, ultimately these efforts have been unsuccessful."
The Group of 20 nations has called repeatedly for U.S. and international accounting rules to be aligned, amid complaints from nations including France and Germany that their banks are placed at a disadvantage by rule differences.