Fascinating stuff from the Telegraph:
Senior fund managers are becoming increasingly frustrated with the International Accounting Standards Board (IASB).
The most ardent critics of IFRS have written a document, now circulating in the City among major investors, that lays out a detailed analysis of the shortcomings of the system in relation to banks. The group believes the IFRS approach allowed certain banks such as HBOS, Bradford & Bingley and Northern Rock to trade while they were insolvent last year.
One of the biggest criticism the way banks provision for losses under IFRS. The old system allowed lenders to smooth their results from one year to the next by guessing at bad debts to come and using forward provisioning, IFRS prevents banks from making a provision unless a loan has actually gone bad. Critics believe the change fundamentally weakened banks.
A fund manager who is a member of the Financial Reporting Council, which oversees accounting and corporate governance, said: "Taking out expected loss bad debt provisioning from IFRS has meant that the process of banks making a risk assessment on all loans at the outset fell out of the scope of the annual accounts. As a result of the numbers being wrong, profits and assets were overstated, the banks looked healthier than they were."
Staggering, but true.
IFRS sent prudence out of the window.
And so they failed.
And nothing has been done to change the rules.
So, no doubt they will fail again.
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[…] Murphy uses a Daily Telegraph report as the basis for suggesting that IASB has effectively thrown the principle of prudence out the window. I was surprised when I read the DT piece which asserts: Some believe the IFRS regime was the […]
Sir,
The provisioning in respect of banks for loans need to be made in advance in view of the delinquency apparent from loan portfolios of the banks.In Indian context the IFRS are slated to be operational from 1st of April,2011 but this is going to rebound!The fact of matter is that the Reserve Bank of India governs the norms in respect of Income Recognition Asset Classification (IRAC)and lays down that the income should be recognized when realized and as per ICAI’s Accounting Standard-9, interest should be recognized when no significant uncertainty exist as to collectivity and classification of assets too is based on the record of recovery as per prudential norms which on term loans states that it is non performing one if interest/installment remain overdue for a period of more than 90 days.In case of the Cash Credit/Overdraft the account is non performing if the outstanding balance remains continuously in excess of the operating limit for more than 90 days or no credits appear for continuously for 90 days or credits in accounts are not sufficient to cover debits during the same period.Based on these prudential norms the assets are classified as standards and sub standard and again based on the periodicity of sub-standard assets these are classified in doubtful categories.Loss assets is the one where collectible amount of securities is less than 10% of the outstanding and is to be provided for 100%.The provisioning is prescribed even in respect of standard assets at a marginal rate and at higher rates in respect of substandard and doubtful ones based on the category.Looking to this aspect of the matter the prevailing practice with IASB has to change and surely this aspect must assumed importance in recent times in the face of global meltdown and the bankers are the chief cause for these remain mostly unregulated as in the US.We need to learn and now is the time we need to be most focused on such issues as IFRS are assuming world wide importance for uniformity in reportage as more than 100 plus countries are already reporting on these basis.Provisioning as in Indian context seems to be more acceptable and stringent.The readers may refer master circular of RBI dated 1st of July,2008 for latest update.