The Handbook of Credit Risk Management, 2nd Edition

CHAPTER 16Accounting Implications of Credit Risk

The objective of this chapter is to highlight some current accounting issues as they relate to credit risk management. In Chapter 6, “Fundamental Credit Analysis,” we approach accounting from the point of view of evaluating the creditworthiness of a prospective or existing counterparty. Understanding basics of how assets, liabilities, contingencies, revenue, and costs are accounted for by a counterparty is integral to understanding that company's credit profile. In this chapter, we instead approach accounting from the point of view of the originator in understanding the accounting implications of originating, holding, or transferring credit risk exposures.

We review accounting guidance from both the Financial Accounting Standards Board (FASB) for U.S. Generally Accepted Accounting Principles (GAAP) and from the International Accounting Standards Board (IASB) for International Financial Reporting Standards (IFRS). Since accounting guidelines in general are continually being updated as they adapt to current business practices and needs, any guidelines that exist at a given time may be amended or superseded by others.

As of July 2021, most countries have adopted IFRS. In the United States, the Securities and Exchange Commission (SEC) is still determining whether to adopt IRFS to replace U.S. GAAP; there does not appear to be momentum towards this outcome though the SEC has stated the value of a uniform set of accounting standards ...