Global Proposal Differs with U.S. on Bank Rules

Global accounting rule-makers proposed a change Thursday that would prompt non-U.S. banks to record losses on bad loans more quickly than they do now, though it wouldn't be as quick as U.S. banks may have to.

Under the proposal by the London-based International Accounting Standards Board, which writes the accounting rules for most countries outside the U.S., banks would book loan losses based on future expectations that the losses will occur. That will speed up the booking of losses -- currently, banks don't record loan losses until there is evidence they have actually happened, an approach that many observers believe led them to be too slow in taking losses during the financial crisis.

The IASB proposal, which was widely expected, spotlights a conflict with the Financial Accounting Standards Board, which writes U.S. accounting rules. The FASB issued a proposal in December that would shift U.S. banks to the expected- loss standard, but the two boards differ on exactly when losses would be booked: If both proposals are approved, U.S. banks could be booking more losses more quickly than their foreign counterparts.

Under the IASB proposal, only those losses expected based on the probability a loan will default in the next 12 months would be recorded upfront -- other losses would be recognized in the future if the loan's credit quality deteriorates significantly. By contrast, the FASB proposal calls for upfront booking of all losses expected over a loan's lifetime.

The effect would be for U.S. banks to record more losses immediately than banks in other countries would. As The Wall Street Journal reported last week, some observers think that could put U.S. banks at a competitive disadvantage and make their current performance appear worse to investors than that of foreign banks.

In documents laying out its proposal, the IASB said its approach leads to a more timely recognition of losses while avoiding front-loading of losses that "does not faithfully represent" the reality of a bank's situation.

The IASB acknowledged in its documents that it and the FASB "have found it difficult" to agree on a uniform solution on booking loan losses. The two boards have been trying to bring U.S. and international accounting rules closer together in a variety of areas, but the years-long effort has been marked by multiple snags and delays.

Both boards' plans are only proposals thus far -- they are seeking public comment before making a final decision, and people on both sides have said they still hope to iron out a compromise that would bring the two divergent proposals together. Public comments on the IASB's proposal are due by July 5.

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