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Journal entry — Financial instruments — FASB authorizes staff to draft final standard on credit impairment

Published on: Apr 27, 2016

At its meeting today, the FASB discussed its credit impairment project and the progress of the transition resource group (TRG) on credit losses. The Board authorized the staff to draft a final standard and also made tentative decisions related to (1) credit quality disclosures, (2) the effective date of the final standard and whether the guidance can be early adopted, and (3) the costs and benefits of the final standard.

TRG Meeting

The Board noted that at its April 1, 2016, meeting, the TRG confirmed that the draft guidance on credit impairment is understandable and operational and reflects the FASB’s decisions to date. For more information on the TRG meeting, see Deloitte’s April 2016 TRG Snapshot.

Credit Quality Disclosures

At a previous meeting, the Board decided that an entity would be required to disclose credit quality indicators for each asset class, disaggregated by vintage, for a period not to exceed five years. However, the Board has since received feedback that the benefits of this disclosure requirement are not substantial for many community banks and credit unions and would not outweigh the costs of its implementation. As a result, the Board tentatively decided at today’s meeting that:  

  1. Public business entities that meet the definition of an SEC filer1 in U.S. GAAP would be required to disclose credit quality indicators disaggregated by year of origination for a five-year period.
  2. Public business entities that do not meet the definition of an SEC filer in U.S. GAAP would be required to disclose credit quality indicators disaggregated by year of origination. However, upon adoption of the standard, they would only be required to present the disclosure for the previous three years and would add another year of information until disclosure can be presented for the previous five years.
  3. Other entities would not be required to disclose credit quality indicators disaggregated by year of origination.   

Effective Date and Early Adoption

In a change from an earlier decision, the Board tentatively decided to defer the effective date of the final standard by one year. As a result:

  1. For public business entities that meet the definition of an SEC filer in U.S. GAAP, the final standard will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
  2. For public business entities that do not meet the definition of an SEC filer in U.S. GAAP, the final standard will be effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.
  3. For all other entities, the final standard will be effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years beginning after December 15, 2021.

In addition, the Board decided that an entity is permitted to early adopt the final standard for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

Costs and Benefits

The Board indicated that the new guidance would provide users with more relevant, reliable, and timely information about credit risk in financial instruments and the change in expected credit losses during a reporting period. The FASB acknowledged that some entities may face challenges implementing the final guidance but concluded that its benefits outweigh the costs.

Next Steps

The Board authorized the staff to draft a final Accounting Standards Update, which is expected to be issued at the end of the second quarter of 2016. The FASB staff will continue to assess and present to the Board any additional issues identified during the drafting of the final standard.

 


1 Under U.S. GAAP, an SEC filer is defined as follows:

An entity that is required to file or furnish its financial statements with either of the following:

  1. The Securities and Exchange Commission (SEC)
  2. With respect to an entity subject to Section 12(i) of the Securities Exchange Act of 1934, as amended, the appropriate agency under that Section.

Financial statements for other entities that are not otherwise SEC filers whose financial statements are included in a submission by another SEC filer are not included within this definition.

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