The idea behind the FASB's credit loss proposal is that it would require banks to report the future losses they expect to incur on their loan portfolios. If you think that would require a lot of judgment — or maybe a Magic 8 Ball — you'd be right!
The FASB proposal would allow banks to use their own forecasts of future loan losses, injecting more judgment and bias into the process, said Jack Ciesielski, publisher of the Analyst's Accounting Observer.
And if you think that sounds like a really great way to manipulate earnings results, then ex-FASB member Edward Trott agrees with you!
"If I had to dream up a way to manage earnings, I think this is probably as good as it gets," said Edward Trott, a former member of FASB, which writes the standards for the United States' Generally Accepted Accounting Principles (GAAP).
"The question isn't so much will somebody do bad accounting with this; somebody will," Ciesielski said. "The question is, will it become widespread, accepted practice to do the accounting badly?"