The FT has two articles this morning highlighting the failure of accounting rules to handle the impact of the coronavirus crisis, most especially in banking.
The problem that is being faced has persisted since 2005 when International Financial Reporting Standards were introduced as the de facto accounting standard system for the UK, the EU and over 100 other countries.
This is not the moment to critique the multitudinous failings of IFRS accounting, although they exist. It is instead the moment to note that they are the very opposite of the reasonably objective standards for reporting that any user of accounts might require, most especially at times like this.
The current problem relates to loss reporting.
OK, blah, blah. Effectively, current rules say you only recognise a loss on a loan when that loss has occurred. As opposed to what should, possibly, be done which is to recognise a loss when you think that a loss is going to occur.
For example, today, if you held the debt of a fracking firm you might reasonably think that it’s not going to pay you back all that cash. But it has done so far. Yes, probably better to be recognising that future loss right now. Perhaps with some probability weighting, net present value etc or summat.
So, Ritchie does actually have a point.
But there’s some fun to be had all the same:
The Financial Accounting Standards Board (FASB) issued the final current expected credit loss (CECL) standard on June 16, 2016. After the financial crisis in 2007-2008, the FASB decided to revisit how banks estimate losses in the allowance for loan and lease losses (ALLL) calculation. Currently, the impairment model is based on incurred losses, and investments are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. This model will be replaced by the new CECL model.
Under the new current expected credit loss model, financial institutions will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan. The transition to the CECL model will bring with it significantly greater data requirements and changes to methodologies to accurately account for expected losses under the new parameters.
The American system already works this way. Cool, so Ritchie is saying that we should adopt American accounting standards as they’ve already solved this problem. Except, of course Ritchie says no such thing. Either because he can’t bring himself to applaud the US method or because he doesn’t know about it.
Let’s now scrap this neoliberal form of accounting
Tchah, silly me, we can’t copy the Americans because they’re neoliberals, aren’t they?