Accountants at depositories may have to change the way they count loans and securities — including mortgages — that might go bad.
The Financial Accounting Standards Board is considering a new method for calculating reserves as part of a sweeping proposal that has gotten more attention for its fair-value mandate. The new method would be the biggest change to reserving practices in more than three decades, experts said.
Some in the industry favor the proposal, which would require banks to set reserves based on long-term loss expectations rather than wait for possible signs of imminent default. The advantage, they said, is that balance sheets would more accurately portray the present value of cash flows expected to be collected.
Opponents argue that the plan would front-load credit costs, which would also reduce income and pressure capital, without empowering banks to pad reserves during good times. All agree that neither plan fully removes subjectivity from reserving methods, which already vary among banks.
"There is likely to be a huge and immediate charge" to the bottom line if the changes are implemented, said Dorsey Baskin, a partner in the national professional standards group at Grant Thornton. "That's because you would be taking an allowance based on past losses and include more reserves for future losses."
