Ernst & Young proposes simpler model for impairment of financial instruments
LONDON, 8 July 2010: Ernst & Young announces its support of the International Accounting Standards Board (IASB) proposals to improve the accounting for impairment of financial instruments measured at amortized cost and its decision to maintain a mixed attribute model as outlined in the exposure draft on Financial instruments: amortized costs and impairment. However, the global professional services organization sees some practical implementation difficulties with the IASB’s “expected loss” model and believes there is a simpler approach that could work.
In its letter responding to the IASB consultation, Ernst & Young says it appreciates the technical merit of the principle of deferring income to reflect anticipated credit losses. However, it believes that the cost of implementation and the very considerable operational difficulties of the proposed expected cash flow approach outweigh the benefits.
Ernst & Young also has concerns around the reliability of the information produced under the proposed model and the mixing of income recognition and impairment in the approach. However, it believes that further development and simplification of the proposed approach may address such concerns.
Ruth Picker, Ernst & Young’s Global IFRS Leader, says: “We are pleased that the IASB’s Expert Advisory Panel is looking at this approach and assessing its merit. We also note that the Financial Accounting Standards Board (FASB) has come up with a different approach and we have not yet responded to them given the different timing of the Boards' projects.
“We support the IASB’s efforts to improve the accounting for impairment of financial instruments measured at amortized cost and its decision to maintain a mixed attribute model. We believe that with some modifications, the IASB can considerably reduce the cost and operational difficulties facing companies should it decide to go ahead on the proposed basis.
Picker concludes: “It is clear that both boards have pressing schedules ahead of them and we support their decision last week to delay certain projects to allow adequate time for deliberations and due process. However, we do not support the continuing divergence of the boards on the important topic of financial instruments and we urge them to work together to achieve convergence.”
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