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Journal entry — Impairment of financial assets — FASB and IASB continue discussions

Published on: Jan 30, 2012

Focusing exclusively on issues related to purchased financial assets for which there is an explicit expectation of losses at acquisition, the FASB and IASB continued discussing their “three-bucket” expected-loss impairment model at their joint meeting last Friday.

Initial Classification and Presentation

The boards tentatively decided that purchased financial assets with an explicit expectation of losses should be initially classified in Bucket 2 or 3 and that an impairment allowance should be subsequently recognized on the basis of the changes in lifetime expected cash flows since acquisition. Under this approach, no impairment expense is recognized upon initial classification; rather, an impairment expense is only recognized upon changes in initial expectations after initial classification.

The boards also tentatively decided that at initial acquisition, an entity would not present separately an allowance balance for incurred losses that existed at the time of acquisition for purchased financial assets and for which there is an explicit expectation of losses. Rather, the entity would present the purchased financial assets in its statement of financial position in the cash flows the entity expects to collect from those assets at acquisition. The boards intend to develop disclosures as part of an “impairment disclosure package” about incurred losses that existed at the time of acquisition for purchased financial assets in which an explicit expectation of losses exists at acquisition.

Changes in Expectations After Acquisition

The boards discussed the accounting for improvements in the credit quality of purchased financial assets for which there had been an explicit expectation of losses at acquisition. The boards tentatively decided that increases in cash flows expected to be collected are recognized immediately in profit and loss as a reduction of the impairment provision but that this contra-provision amount must be disclosed in the footnotes.

Scope

The boards discussed how to define the scope of purchased financial assets that would be initially classified in Buckets 2 or 3, including the level of aggregation (i.e., individual asset level or purchased portfolio level) that an entity should use to determine whether the financial assets meet the scope requirements. While certain alternatives were discussed; for example, (1) basing the scope on existing guidance under U.S. GAAP and IFRSs or (2) broadening the scope to include financial assets with any discount attributable to credit concerns, the boards made no decisions about the scope of the guidance on purchased financial assets for which there is an explicit expectation of losses.

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