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

Published on: Apr 24, 2012

At their joint meetings last week, the FASB and IASB continued discussing their “three-bucket” expected-loss approach to the impairment of financial assets. The boards clarified previous decisions made regarding the estimate of expected credit losses and the objective of the Bucket 1 impairment allowance. In addition, the boards made tentative decisions regarding trade receivables and discussed the remaining steps of the impairment project.

Estimate of Expected Credit Losses

The boards clarified that the estimate of expected credit losses should reflect (1) all reasonable and supportable information that is considered relevant to the forward-looking estimate, (2) a range of possible outcomes that takes into account the likelihood and reasonableness of those outcomes (i.e., the estimate is not merely the “most likely outcome”), and (3) the time value of money.

Objective of the Bucket 1 Impairment Allowance

The boards clarified that for financial assets for which a loss event is expected in the next 12 months, the Bucket 1 measurement objective is to record lifetime expected credit losses and not just cash shortfalls over the next 12 months.

Trade Receivables

The boards tentatively decided that entities could apply the three-bucket expected-loss model or, as a practical expedient, a provision matrix when estimating expected credit losses for trade receivables without significant financing components. Under current U.S. GAAP and IFRSs, an entity can use a provision matrix to estimate credit losses on portfolios of trade receivables grouped by customer bases by using historical loss patterns or days past due.

Next Steps

The FASB and IASB staffs stated that the boards still need to discuss off-balance-sheet items such as loan commitments, disclosures, and transition provisions. Further, the boards may need to discuss the three-bucket expected-loss impairment model’s application to debt securities and any follow-up issues related to the future decisions made in the project on the classification and measurement of financial instruments. The boards are expected to publish exposure drafts on the impairment proposals in the second half of 2012.

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