The Emergence of the ‘Incurred-Loss’ Model for Credit Losses in IAS 39

Kees Camfferman

60 citations0/0 files storedAccounting in Europe

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Accounting Theory and Financial Reporting Auditing, Earnings Management, Governance Accounting and Financial Management

Abstract

Following the financial crisis, the view became widespread that IFRS, because it is based on a so-called incurred-loss approach, led to significant overstatements of financial assets by placing tight restrictions on the recognition of loan losses. As a result, the IASB undertook a project to introduce an alternative expected-loss model in its standards which would allow earlier recognition of loan losses. This paper is a historical study of the introduction of the incurred loss model in IAS 39 between 1998 and 2003. With respect to the topic of loan losses, it argues that, especially at the beginning of that period, it was not yet common to view the issue in terms of a clear-cut dichotomy of incurred-loss versus expected-loss models, and that this had a significant complicating influence on the course of the debate. More generally, the paper illustrates some of the pressures on the quality of the Board’s due process during its early years, when it attempted to complete an ambitious agenda in time for the first mass adoption of IFRS in 2005. While this paper takes no position on the correctness of the IASB’s decisions as embodied in IAS 39 (2003), it does suggest that the episode covered provides justification for the considerable enhancements of its due process effected by the IASB over recent years.

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References

2011Mandatory IFRS Adoption and Accounting Quality of European Banks (2011), with Günther Gebhardt 2000Bank Loan-Loss Accounting: A Review of Theoretical and Empirical Evidence 2007Financial Reporting and Global Capital Markets 2012The politics of accounting regulation: organizing transnational standard setting in financial reporting 2012The Evolution of the IASC into the IASB, and the Challenges it Faces 2012The Politics of Accounting Regulation 2004IAS 39: Where Different Accounting Models Collide 2015Aiming for Global Accounting Standards

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