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Journal entry — Financial instruments — FASB makes tentative decisions on credit impairment

Published on: Sep 04, 2014

At its meeting yesterday, the FASB discussed (1) the definition of a write-off; (2) whether an entity should consider renewals, extensions, and modifications in estimating expected credit losses; and (3) how an entity would estimate expected credit losses on certain loan commitments.

The Board reaffirmed and made tentative decisions related to the following:1

Definition of a Write-Off

The Board tentatively decided to “[r]etain the principle in current generally accepted accounting principles (GAAP), which would require an entity to write off financial assets in the period in which the financial assets are deemed uncollectible.” In addition, the Board tentatively decided that this write-off guidance would apply to debt securities that are classified and measured as available for sale.

Extensions, Renewals, and Modifications for Financial Assets With a Stated Contractual Maturity

At its September 17, 2013, meeting, the Board had tentatively decided that an entity would consider all contractual cash flows over the life of the asset, including reasonably expected prepayments. However, renewals, extensions, and modifications would not be considered unless the entity reasonably expects to execute a troubled debt restructuring with a borrower. At yesterday’s meeting, the Board reaffirmed that decision.

Estimating Expected Credit Losses on the Funded Portion and Unfunded Portion of Loan Commitments

During the meeting, the Board considered feedback obtained at informal workshops with preparers, auditors, and regulators. Some stakeholders noted that the determination of expected credit losses for loan commitments might be challenging, since often the “payment terms and contractual maturities may not be explicitly stated.” In light of this feedback, the Board discussed the contractual term that an entity should consider in determining expected credit losses on the funded and unfunded portions of loan commitments (including credit card receivables).

At yesterday’s meeting, the Board tentatively decided that the estimate of expected credit losses on the funded portion of loan commitments should be based on the contractual term of the loan adjusted for any expected prepayments and expected troubled debt restructuring activity.

Editor’s Note: The proposed ASU2 provides the following guidance on estimating expected credit losses on loan commitments:

"[A]n entity would estimate credit losses over the full contractual period over which the entity is exposed to credit risk via a present legal obligation to extend credit, unless unconditionally cancellable by the issuer. For that period of exposure, the estimate of expected credit losses should consider both the likelihood that funding will occur (which may be affected by, for example, a material adverse change clause) and an estimate of expected credit losses on commitments expected to be funded."  

In addition, the Board tentatively decided to retain the proposed ASU’s guidance on estimating expected credit losses on the unfunded portion of loan commitments.

Next Steps

At future meetings, the FASB will continue redeliberating credit impairment, including scope and disclosures. See Deloitte’s August 8, 2014, Heads Up for more information.


1 See the FASB's September 3, 2014, meeting handout.

2 FASB Proposed Accounting Standards Update, Financial Instruments — Credit Losses (Subtopic 825-15).

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