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Journal entry — FASB and IASB move forward on the impairment of financial assets

Published on: Jun 15, 2011

The IASB and FASB (the “boards”) met today to discuss next steps for their project on the impairment of financial assets. Specifically, the boards tentatively agreed to develop a new impairment model in which loans subject to impairment accounting would be split into three main buckets that determine the amount and timing of credit losses to be recognized.

  • Bucket 1 — Comprises assets that, while not affected by observable events that directly relate to possible future defaults, are affected by macroeconomic events that may change expected credit losses. An entity recognizes an allowance balance equal to 12 months of initial expected credit losses plus the full amount of changes in expected credit losses (the boards acknowledge that the proposed allowance calculation in Bucket 1 may be operationally complex, particularly in an open portfolio setting).
  • Bucket 2 — Comprises assets that are affected by the occurrence of observable events that directly relate to future defaults; however, the default is not specifically identifiable for an individual asset. The allowance balance for this bucket is determined on the basis of a portfolio-level calculation of the full lifetime expected losses.
  • Bucket 3 — Comprises assets to which expected or incurred losses can be specifically attributed. The allowance balance is the full lifetime expected losses for the loans in this bucket.

Although the boards discussed possibly releasing an exposure draft in September, they did not set a timetable for when they would meet to rediscuss the model.

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