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Journal entry — FASB and IASB reach tentative decisions on credit impairment

Published on: Dec 20, 2010

On Thursday, December 16, 2010, the FASB and IASB continued discussions on the credit impairment portion of their joint project on accounting for financial instruments. The boards tentatively decided to issue, for public comment, a supplemental document seeking input from constituents on tentative decisions to date. The FASB and IASB expect to issue the supplemental document in January 2011 for a 60-day comment period.

The supplemental document is intended to provide the boards with direction on a recognition baseline and to enable them to understand operational difficulties associated with the recognition alternatives discussed. More specifically, the supplemental document is expected to express the following tentative decisions:

  • The boards believe that expected credit losses (1) are determined on the basis of all available information (i.e., including certain forward-looking information) and (2) include amounts that are not recoverable over the life of the asset.
  • The boards support two recognition models but have a preference for one:
  • Under the preferred model, entities would recognize expected credit losses by using a “good” book and “bad” book approach. Lifetime expected losses for assets in the bad book would be fully recognized immediately. For assets in the good book, entities would be required to recognize the higher of (1) a loss estimate based on the amount of credit losses expected to occur within a period that can be reliably estimated (no less than 12 months) or (2) the expected loss estimate apportioned to the period passed, calculated by using a time-proportionate ratio (i.e., weighted-average age to weighted-average life).
  • Under the other model, entities would immediately recognize the amount of credit losses expected to emerge in a period that can be reliably estimated. This period could represent a portion of the asset’s life or its full life.

The IASB chairman stated that the supplemental document will indicate that (1) the issuance of the document is only one important step in the development of a comprehensive credit impairment model and (2) other credit impairment issues have yet to be resolved. Further, while the supplemental document’s comment period is open, both boards and respective staffs will be conducting joint outreach sessions to further understand the operational issues associated with the recognition alternatives.

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