Convergence Projcect Essay

Submitted By SurazSubedi1
Words: 1846
Pages: 8

INTRTODUCTION

The United States of America has a huge influence on the accounting standards all over the world. USA follows Financial Accounting Standards Board (FASB), which has many standards that are disseminated by the international accounting standards committees. Rest of the world is following International Accounting Standards Board (IASB). So to remove the differences between these two accounting board, in September 2002 the IASB and the FASB agreed to work together along with other countries with a project so called convergence project.( The IFRS Foundation and the IASB 2013)

Convergence project is aimed to reduce the differences between accounting standards and make a common global reporting language especially focused to reduce the difference between FASB and IASB. Use of single accounting standard allows for the comparability over all financial markets, regardless of the country of origin and even this gives a clear and better information to the investors. With the succession of this project the financial reporting complexity especially for multinational companies will decrease. Apart from the efficiency companies will have cost advantages.

The last few years have been among the most turbulent ever in the financial services sector. The credit crisis has highlighted the need to strengthen accounting recognition of credit loss allowances and disclosures of credit quality. Specifically, the current incurred loss model applied under US GAAP has been criticized for recognizing losses too late. So in 2010 both standard agreed to develop a three bucket model for impairment (Financial Accounting Standard Board 2013). The idea of three bucket is pretty simple— three separate buckets, each with a range of investments meeting specific needs over a particular time horizon. The first bucket contains assets that do not display evidence of possible future default, at either the portfolio or asset level. As currently proposed, these assets will receive an allowance equal to the forthcoming 12 months of expected credit losses. The assets classified in the second bucket have slightly longer time horizon than bucket one. However, no individual assets are identified as having a specific risk of default. The portfolio of assets in this second bucket would receive an allowance equal to the estimate of the losses expected over the full remaining lifetime of the asset. The assets classified in the third bucket also have attributes similar to those in bucket two, but can be identified at the asset or instrument specific level. As in bucket two, the assets in the third bucket would receive an allowance in three possible approaches. Those are 12 months’ worth of expected credit losses or time proportional amount of remaining lifetime expected credit losses or 12 months worth of expected credit losses based on initial expectations plus the full remaining lifetime effect of any changes in expected credit losses.( International Accounting Standard Board 2013). However responding to criticisms that the current allowance model does not adequately estimate losses until it is too late, In the latter half of 2012, the Financial Accounting Standards Board (FASB) decided to develop a new Current Expected Credit Loss (CECL) model. The CECL model retains the three-bucket model’s main concept of expected credit loss, and the current recognition of the effects of credit deterioration. But the CECL model uses a single measurement objective i.e. current estimate of expected credit losses rather than the dual-measurement approach of three-bucket model. Current estimate of expected credit losses is based on the current risk ratings of the assets, historical loss experience for assets with similar risk ratings and remaining lives, adjusted for changes in current circumstances, and reasonable and supportable expectations about the future. (The IFRS Foundation and the IASB 2013) CECL reflects management's current estimate of the future contractual…