Hristina Oreshkova
University of National and World Economy (UNWE), Faculty of Finance and Accounting Sofia, Bulgaria

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4th International Conference – ERAZ 2018 – KNOWLEDGE BASED SUSTAINABLE ECONOMIC DEVELOPMENT, Sofia- Bulgaria, June 7, 2018, CONFERENCE PROCEEDINGS published by: Association of Economists and Managers of the Balkans, Belgrade, Serbia;  Faculty of Business Studies, Mediterranean University – Podgorica, Montenegro; University of National and World Economy – Sofia, Bulgaria; Faculty of Commercial and Business Studies – Celje, Slovenia; Faculty of Applied Management, Economics and Finance – Belgrade, Serbia, ISBN 978-86-80194-12-7


The most recent global crisis of 2007 to 2009 exposed considerable vulnerability and numerous weaknesses of the financial system worldwide. More specifically the crisis highlighted the costs incurring because of delays in recognition of credit losses on loans and receivables not only on the part of banks, but also on the part of other financial institutions and lenders. All this proved out to be inconsistent with the philosophy of prudence, for long considered an overriding accounting principal especially in Continental Europe and an essential theoretical concept in the Anglo-Saxon world. Subsequently the debates on the matter have extremely intensified, and it has become more than obvious that the strategic far-reaching goal of making efforts to globally improve not only the resilience of the financial system, but the lending practices as a whole should be regarded as being of highest priority.
Logically the considerable part of the discussions has focused extremely on the essence of various shortcomings in accounting standards that embody or are based on a prudential philosophy, the relevant requirements, and, on the everlasting societal and social necessity of neutral and well-balanced compliance with the guiding principles of prudential policy as well as on the key importance of regulatory oversight process as emphasized by the G20.
Consequently a major area of focus for a long time up to now has been the development of coherent approaches, and attempts have been globally made to search for and propose well-grounded models of accounting recognition of objects, whose valuation needs estimation, so as to resolve the most crucial problems as the issue of provisioning for loan losses. All this has not occurred unexpectedly. The recognition of loan losses and the provisioning for loan losses consistent with the previous International Accounting Standards approaches have also been criticized as not being designed on a prudential basis even to the point of being unsound. As a result the new IFRS 9 Financial Instruments was intended to respond to attacks on the part of large number of academicians, professionals and other stakeholders. The major motive was that IAS 39 Financial Instruments: Recognition and Measurement was perceived as too complex, inconsistent in the approaches to recognizing losses experiencing because of impairment of financial assets of various categories, and inconsistent with the manner entities manage their business activities and inherent risks. There was criticism and disapproval because some of the rules under IAS 39 give rise to significant delays in the recognition of credit losses on loans and loan receivables until it is too late in the credit cycle.
The key question of whether the International Accounting Standards Board’s decision to introduce the model of expected credit losses will contribute to achieve greater transparency of the information produced for and provided by financial statements, and whether it will improve its quality, still stands. It is too early probably to give an objective and unambiguous answer, and any attempt to generalize would most probably be not unmistakable. At present the most realistic answer perhaps is that this will largely depend on the specific circumstances, since too much subjective judgements regarding the possible impact of various external and internal factors and indicators, including ones related to the forward-looking macroeconomic conditions, will influence the reliability (consistency) of the estimates of the expected credit losses; the reliability of these judgments will depend first and foremost on the competencies, professionalism, expertise, integrity and the independence and professional responsibilities of people at the highest levels of corporate governance and management.
The underlying argument, central to the present article, supporting the author’s view, is that too much discretionary power in modelling expected credit losses is retained, that is, set aside for entities’ officials, executives, high-ranking managers and other superiors. The discussions on the possible implications of the expected credit loss model under IFRS 9 often emphasize that such circumstance may potentially inhibit the long-standing efforts targeted at achieving greater transparency of information, which is inherent in IFRS 9 main objectives.
Managerial shifts towards more prudential policies can be expected, and that in turn can possibly improve the transparency not only in theory. However, in practice that may not be the case at all times. The implementation of the new expected credit loss model poses challenges for many undertakings concerned. Actions are needed on the part of policy makers to ensure consistency in its development and implementation, in order to constrain the emergence of potential dissimilarities in respect of the reported results even if created under the burden of similar set of risky circumstances. As regards disclosure of information related to the inputs, assumptions and techniques used to duly identify significant increases in credit risk and to estimate expected credit losses (ECLs), they will continue to be crucial, and its quality not just quantity will be of great importance for improving transparency and taking advantage of the forecasted (predicted) reduced procyclicality.
A complete understanding of the importance of auditors’ key role would be also critical. This could be constructive in promoting an improvement of auditing practices worldwide, and, as a result of this, in achieving the long-desired higher degree of quality of financial statements information, and globally restoring trust in its credibility.

Key words

Prudence, incurred loss model, expected loss model, transparency, managerial discretion, financial accounting and financial reporting;


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