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IASB Chairman Talk Booms, Busts and Loss Models

International Accounting Standards Board Chairman Hans Hoogervorst recently di

International Accounting Standards Board Chairman Hans Hoogervorst discussed his agency's influence on the boom and bust of the marketplace, as well as new accounting standards and models that are on the horizon, during a recent speech at the third European Central Bank Conference on Accounting, Financial Reporting and Corporate Governance for Central Banks in Frankfurt.

A new expected loss model being discussed by the IASB would allow bankers to more quickly write down debt to help help them deal with sovereign debts on their balance sheets. According to Hoogervorst, that new model should be available soon.

“From day one, for all new financial assets, an allowance balance needs to be built up that captures the expected losses in the next 12 months,” he said. “If credit quality deteriorates subsequently to such an extent that it becomes at least reasonably possible that contractual cash flows may not be recoverable, lifetime losses need to be recognized. We will not try to define exactly what ‘reasonably possible’ means, but it primarily refers to the inflection point when the likelihood of cash shortfalls begins to increase at an accelerated rate as an asset deteriorates.”

Hoogervorst also sought to dismiss the notion that new rules and regulations from his agency or from the new International Financial Reporting Standards would alleviate some of the market uncertainties surrounding booms and busts, noting that economic cycles can be too powerful to be dented significantly by accounting.