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

Published on: Feb 29, 2012

At their joint meeting yesterday, the FASB and IASB (the “boards”) continued discussing their “three-bucket” expected-loss impairment model, specifically focusing on (1) whether and, if so, under what circumstances financial assets would be returned to Bucket 1 and (2) the application of the impairment model to trade receivables.

Return to Bucket 1

The boards tentatively decided that originated and purchased non-credit-impaired assets would be moved back to Bucket 1 when the downward transfer principle1 is no longer satisfied. Therefore, an entity would return an asset to Bucket 1 when (1) there has not been a more than insignificant deterioration in the asset’s credit quality or (2) the likelihood of default is such that it is no longer at least reasonably possible that the contractual cash flows may not be recoverable. The boards also tentatively decided that purchased credit-impaired assets would remain in Bucket 2 or 3 for their lifetime, even if the credit quality of the assets improves.

Application of the Impairment Model to Trade Receivables

Until this meeting, the boards had excluded trade receivables from the scope of their decisions about the three-bucket expected-loss impairment model. However, the boards tentatively decided yesterday that trade receivables2 with and without a significant financing element would be subject to an expected-loss model.

For trade receivables with a significant financing element, the boards tentatively decided that entities could elect to either fully apply the three-bucket expected-loss impairment model or, as a practical expedient, follow a more simplified approach. Under the simplified approach, the receivables would be initially classified in Bucket 2 or 3, expected lifetime losses would be reserved, and credit deterioration would not need to be tracked for disclosure purposes.

For trade receivables without a significant financing element, the boards tentatively decided that entities must follow the simplified approach described above for trade receivables with a significant financing element.


[1] Under the downward transfer principle, which was discussed at the boards’ joint meeting in December 2011, entities should recognize lifetime expected losses (i.e., transfer assets out of Bucket 1) when there has been a more than insignificant deterioration in credit quality since initial recognition and it is at least reasonably possible that the contractual cash flows may not be fully recoverable. See Deloitte’s December 21, 2011, journal entry for more information.

[2] As used here, “trade receivables” refer to receivables resulting from customer transactions within the scope of the revised exposure draft on revenue recognition, Revenue From Contracts With Customers.

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