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By Ronald Fink
Banks will soon face stricter reporting requirements for loan losses, Robert Herz, chairman of the Financial Accounting Standards Board, said in an interview published last week.
Herz said FASB will establish new rules for disclosing non-performing assets, and noted the current rules contain no definition of such assets.
Although bank regulators require loans on which payments are past due for 90 days or longer to be disclosed, that requirement is not part of generally accepted accounting principles, so banks needn't report those losses in their financial statements.
"We are going to discuss these matters in January," Herz said in a Q&A with Christopher Whalen, a bank analyst who runs the website, Institutional Risk Analytics. Herz added that the outcome of FASB's discussions could result in changes to a recent FASB proposal aimed at providing "more granular disclosure" of loan portfolio data and "much more detail" regarding loan losses and reserves against them.
His comments were made in response to an observation by Whalen that guidance on loan loss disclosure the Federal Reserve Board recently gave to banks has been interpreted by investors, accurately or not, as "forbearance."
Herz also indicated FASB would provide banks with more leeway when reserving against future losses. Currently, the rules prevent banks from maintaining reserves for future losses unless they are deemed "probable," which bank regulators have criticized as leading to inadequate reserves during financial crises, including the most recent one.
In the past, FASB has responded to such criticism by noting such reserves could be used to manipulate earnings. But in the interview, Herz said FASB would allow reserves against losses foreseen with less certainty so long as the board was satisfied such leeway wouldn't be abused.
"The idea is to see if we can put some real rigor around the process," Herz said. "We are going to look at whether there are ways to estimate losses over a longer time horizon using relevant data, history, etc."
Herz noted these two issues are at the top of FASB's agenda regarding banks' accounting practices.
"Our main points of focus in 2010 in this area will be on improving the disclosures relating to loan portfolios and on trying to develop a more forward looking approach to developing loan loss allowances," the FASB chairman said.
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