Deloitte and PwC debate how banks account for losses
15 Feb 10
Deloitte and PricewaterhouseCoopers have reignited the debate over the way that banks account for losses, which could threaten agreement on a global set of accounting standards by the middle of next year, an aim of the group of 20 nations
Jim Quigley, global head of Deloitte Touche Tohmatsu, has told the Financial Times that he is an “advocate” of banks making loan loss provisions for “incurred losses” separately from “expected losses” – and reporting them in two different lines in their accounts.
However, PwC has criticised the proposal, saying it would “muddy the waters”.
Politicians and regulators have blamed the current system of “incurred losses” – whereby companies may make provision for loan losses only as they occur – for exacerbating the crisis, by encouraging a cyclical approach to risk management.
But that view is questioned by many accountants and bankers who argue that “incurred losses” give investors clarity. Accountants and bankers are also sceptical about the “expected loss” model, as they fear it raises the risk of “cookie jar” accounting, whereby executives put funds aside during years of bumper profits only to release them later to cover up bad performance.
Mr Quigley said he believed that “one way we can bridge some of the current conflicts in financial reporting is with transparency”. “The two-line idea accomplishes that transparency objective,” he told the FT. However, PwC has said it is opposed to putting two lines in the income statement.