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Revamped accounting rule to gradually affect US banks

Wednesday, 04 January 2012
Revamped accounting rule to gradually affect US banks Fitch Ratings says a new accounting rule change requiring banks to book losses on loans sooner will have a gradual affect on US bank income statements. In theory, the suggested change would give banks more time to replenish capital cushions by setting aside reserves as a result of projected loan losses, insulating investors. However, the ratings agency does not believe the proposed changes will have anymaterial  impact on the ratings of US banks. http://www.ftseglobalmarkets.com/

Fitch Ratings says a new accounting rule change requiring banks to book losses on loans sooner will have a gradual affect on US bank income statements. In theory, the suggested change would give banks more time to replenish capital cushions by setting aside reserves as a result of projected loan losses, insulating investors. However, the ratings agency does not believe the proposed changes will have anymaterial  impact on the ratings of US banks.

The United States’ Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) agreed in late December 2011 on a draft proposal that would supersede banks' incurred loan loss approach with a speedier "expected loss" one. Under the model, banks will be required to book projected losses spanning the next 12 months instead of recording losses after they have actually occurred. A formal proposal is expected in 2012.

Ratings agency Fitch believes that if the rule implemented, it would bring greater clarity to bank financial statements as it is forward looking and recognition of exposure is certainly encouraged. Moreover, says Fitch, while changes in accounting for the financial industry coupled with regulatory reform heighten uncertainty, banks have been aggressive in responding earlier to reform suggestions as they have been afforded ample time to do so.

Meanwhile, the has FASB agreed to keep unchanged balance sheet offsetting rules, effectively preserving the single largest balance sheet difference between financial institutions filing under the IFRS framework and US GAAP. However, new common disclosure rules for both regimes provide the necessary information to make adjustments for comparability.

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