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Why the Current Proposal on Loan-Loss Accounting Is Flawed

Scott Taub | May 21, 2013

In January 2011, FASB and IASB issued a proposal regarding loan losses that suggested separating loans into a “good book” and a “bad book” based on whether each loan had an indication of a credit loss or not. The 2011 proposal would have required a reserve for all expected losses on the bad book and for some expected losses on the good book. The approach would have eliminated the need for a loss to have actually occurred before it was recognized.

At the time, I wrote about my concern that FASB seemed to be abandoning the concept of recording things as they happen, not before (or after) they occur. When FASB decided not to move ahead with the 2011 proposal I was at first optimistic, but this was entirely unwarranted. Not only did the replacement proposal, issued late last year, keep the goal of recognizing losses before they occur, but it actually doubled-...

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