This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

Journal entry — Financial instruments — FASB makes tentative decisions about credit impairment disclosures and project scope

Published on: Oct 30, 2014

At its meeting yesterday, the FASB discussed credit impairment disclosures and the scope of its impairment project.

Disclosures

The Board made the following tentative decisions about credit impairment disclosures:

  • Factors that influenced management’s estimate — The Board tentatively decided to retain the requirement in its December 20, 2012, exposure draft (ED)1 that an entity must disclose information that “influenced management’s current estimate of expected credit losses,” including forward-looking information used to record the estimate of expected credit losses.2
  • Policy for determining write-offs — Because it had previously decided to retain the existing U.S. GAAP write-off principle (see Deloitte’s September 4, 2014, journal entry for more information), the FASB tentatively decided that an entity should continue to disclose its write-off policy for uncollectible receivables.
  • Reasonable and supportable forecasts — The Board tentatively decided not to require an entity to disclose the period over which it performed a reasonable and supportable forecast.
  • Nonaccrual status — Because it had previously decided not to provide explicit nonaccrual guidance (see Deloitte’s June 16, 2014, journal entry for more information), the FASB tentatively decided to retain existing requirements for U.S. GAAP nonaccrual policy disclosures.
  • Collateralized financial assets — The Board tentatively decided that the ED’s qualitative disclosure requirements for collateralized financial assets would apply only to collateral-dependent financial assets.3
  • Past-due status — The Board tentatively decided to require an entity to disclose past-due information on held-to-maturity and held-for-investment financial assets.

Although the Board discussed rollforward disclosures of an entity’s allowance and amortized cost balances, it did not make any decisions. Rather, the Board directed the staff to perform additional outreach with constituents to understand the operational challenges associated with the disclosures. The Board plans to discuss at a future meeting these rollforward disclosures and whether all of the tentative disclosure requirements should apply to available-for-sale debt securities.

Editor’s Note: The tentative decision to require an entity to disclose forward-looking information as part of its “factors that influenced management’s estimate” is consistent with the FASB’s proposed decision-making framework for determining disclosures to require in notes to financial statements, which permits future-oriented information if it pertains to estimates and assumptions used as inputs to measurements (see Deloitte’s March 6, 2014, Heads Up for more information).

The Board also directed the staff to coordinate with the disclosure framework project team to ensure consistency with the disclosure decision-making framework.

Scope

The Board tentatively decided that the proposed current expected credit loss (CECL) model applies to the following debt instruments:

  • Financial guarantee contracts (currently accounted for under ASC 4604).
  • Reinsurance receivables that result from insurance transactions.
  • Loans of a not-for-profit entity issued to meet their mission statement (programmatic loans).
  • Loans and receivables from related parties, except those between entities under common control.

The Board tentatively decided that the CECL model would not apply to the following debt instruments:

  • Loans made to participants by defined contribution employee benefit plans.
  • Policy loan receivables of an insurance entity.
  • Pledge receivables (promises to give) of a not-for-profit entity.
  • Loans and receivables between entities under common control.

As a result of the Board’s tentative decisions regarding the scope of the CECL model, the Board will discuss at a future meeting the disclosure requirements for financial guarantees and not-for-profit programmatic loans. As part of this discussion, the Board will consider whether to extend the existing short-term trade receivable5 disclosure exceptions to these financial assets.

____________________

1 FASB Proposed Accounting Standards Update, Financial Instruments — Credit Losses.

2 Paragraphs 825-15-50-9(b) and 50-9(d) of the ED.

3 The ED defines a collateral-dependent financial asset as a “financial asset for which the repayment is expected to be provided primarily or substantially through the operation (by the lender) or sale of the collateral, based on an entity’s assessment as of the reporting date.”

4 FASB Accounting Standards Codification Topic 460, Guarantees.

5 Paragraph 825-15-50-7 of the ED.

Financial instruments — FASB makes tentative decisions about credit impairment disclosures and project scope Image

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.