Mar 26th 2013
By Frank Byrt
On March 25, the Financial Accounting Standards Board (FASB) posted on its website a sixteen-page staff document that responds to frequently asked questions (FAQs) about its proposed Accounting Standards Update, Financial Instruments – Credit Losses (Subtopic 825-15).
The Exposure Draft, which was released December 20, 2012, is part of the FASB's convergence project with the International Accounting Standards Board (IASB) on financial instruments standards. The comment period for the proposal ends on April 30, 2013.
FASB said one of the lessons learned from the global financial crisis of 2008 is that investors need timelier reporting of credit losses on loans and other financial instruments; hence, the board developed the proposed reporting changes for credit losses. The credit loss model is aimed at establishing and improving standards of financial accounting and reporting in order to provide decision-useful information to investors and other users of financial reports.
In a move away from the traditional "incurred loss" model, FASB's proposed reporting model would require expected credit losses to be estimated based on past events, current conditions, and reasonable and supportable forecasts about the future, or the so-called "expected loss" model.
But possibly complicating matters, the IASB issued its own proposal March 7, which takes a different approach to loan impairment than FASB's. The IASB said its Exposure Draft, Financial Instruments: Expected Credit Losses, builds on the expected credit loss model previously agreed to by IASB and FASB, "but it has been simplified to reflect feedback received from interested parties." That simplification is aimed at improving the timeliness of recognition of the expected credit losses, IASB said, and represents "a more forward-looking provisioning model."
The FASB FAQ document states: "The IASB's March 2013 Exposure Draft proposes that an entity would only recognize a portion of expected credit losses (namely, 12 months of expected credit loss) until a specific recognition trigger has been met (that is, when there has been significant credit deterioration)." This differs from the FASB model, because in the FASB's view, waiting until significant credit deterioration occurs before recognizing a loss defeats the purpose of moving from an incurred loss model to an expected loss model.
"The amount of credit loss that is ultimately recognized would be the same under both the FASB and the IASB impairment models. The difference relates to when losses that are currently expected would be recognized," FASB says in the FAQ document.
FASB said it expects to talk with the IASB this summer about feedback it receives on its December 2012 Exposure Draft and the IASB's March 2013 Exposure Draft.
Access the FASB FAQ document.
- IASB Floats Revised Proposals for Loan-Loss Provisioning
- FASB Overview: New Credit Loss Model
- FASB's Proposal on Expected Credit Loss Model Released Dec. 20, 2012; Comments Due April 30, 2013