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Journal entry — FASB and IASB continue redeliberations on the impairment of financial instruments

Published on: Apr 18, 2011

At their meetings on April 13 and 14, the FASB and IASB (the “boards”) (1) discussed comment letters received on their joint supplementary document, Financial Instruments: Impairment, and other outreach activities and (2) reached several tentative decisions about their project on the impairment of financial assets. The boards’ tentative decisions were as follows:

  • Interest revenue recognition — To determine interest revenue, an entity should apply the effective interest rate to an amortized cost balance that is not reduced for credit impairment. This is a significant change from the boards’ respective exposure drafts on impairment and will allow financial statement users to analyze net interest margin and credit losses separately.
  • Discounting a loss estimate — The measurement of expected losses should reflect the effect of discounting. The boards noted that the final guidance will indicate that different techniques can be used to measure the amount of discounted expected losses and that the unit of account does not need to be an individual loan. This is a change from the joint supplementary document, which permitted either a discounted or an undiscounted expected loss calculation under the time-proportional approach.

In addition, because the boards tentatively decided that the measurement of expected credit losses should reflect the effect of discounting, they also tentatively decided that they did not need to consider the inclusion of a nonaccrual principle for an impairment model at this time.

  • Accreting the discount — The boards tentatively decided that the accretion of the discount in impairment losses should be included in the impairment losses financial statement line item. The boards plan to discuss what additional disclosures should be provided about the effect of accretion on impairment losses at a later date.

At future meetings, the boards will redeliberate the feedback received on the supplementary document as they continue to develop the impairment accounting model.

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