Regulatory treatment of accounting provisions – interim approach and transitional arrangements

Since the publication of International convergence of capital measurement and capital standards (Basel I), the Basel Committee has recognised the close relationship between capital and provisions.1 The timely recognition of, and provision for, credit losses promote safe and sound banking systems and play an important role in bank regulation and supervision. In response to lessons learned from the financial crisis, the international accounting standard-setting bodies have modified provisioning standards to incorporate forward-looking assessments in the estimation of credit losses. Specifically, both the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) have adopted provisioning standards that require use of expected credit loss (ECL) models rather than incurred loss models. International Financial Reporting Standard (IFRS) 9 will take effect on 1 January 2018 and the FASB’s new standard, which introduces the current expected credit losses (CECL) methodology, will take effect on 1 January 2020 for certain banks that are public companies and in 2021 for all other banks, with early application permitted for all banks in 2019.

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