The Financial Accounting Standards Board (FASB) has issued a new rule that stipulated US banks to record estimated losses from loans immediately after granting them.
The new accounting standard will be applicable from 2020 for publicly traded banks and 2021 for privately held firms.
FASB Chair Russell G. Golden said: ""The new standard addresses concerns from a wide range of our stakeholders — including financial statement preparers and users — that the existing incurred loss approach provides insufficient information about an organization’s expected credit losses."
"The new guidance aligns the accounting with the economics of lending by requiring banks and other lending institutions to immediately record the full amount of credit losses that are expected in their loan portfolios, providing investors with better information about those losses on a more timely basis."
Under the current rules, banks record losses when they see a sign of loan recovery getting into trouble.
The new standard is aimed at helping investors to gain better information on the banks’ bad loan scenario.
FASB said: "The Accounting Standards Update (ASU) requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts."
FASB said that financial institutions and other firms will now use forward-looking information to better inform their credit loss estimates.
In 2008, the FASB first initiated a project to improve the financial reporting of credit losses on financial instruments
The new rule may compel the banks to increase their provisions for bad loans.