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FASB proposes an impairment model for all financial assets

  • FASB (old) Image

20 Dec 2012

On 20 December 2012, the US Financial Accounting Standards Board (FASB) issued Proposed Accounting Standards Update, 'Financial Instruments — Credit Losses'. The proposed ASU introduces the current expected credit loss (CECL) model for accounting for the impairment of financial assets. The proposed CECL model is intended to require more timely recognition of credit losses, while also providing additional transparency about credit risk. It replaces the multiple existing impairment models in US GAAP which generally require that a loss be incurred before it is recognised.

The proposed ASU introduces the sole impairment test for financial assets measured at amortised cost or fair value through other comprehensive income (FV-OCI) — irrespective of the form of the asset (i.e., loan versus debt security). Under the proposed model, a reporting entity would recognise an impairment allowance equal to the current estimate of expected credit losses (i.e., all contractual cash flows that the entity does not expect to collect) for such assets as of the end of the reporting period.

The FASB’s proposed impairment model would apply to all financial assets measured at amortised cost or FV-OCI, though it does permit a practical expedient in limited circumstances. Thus, the proposed model would apply to trade and lease receivables and loan commitments not measured at fair value through net income (FV-NI).

Comments on the proposed ASU are due by 30 April 2013.

Comparison with IFRS

The approach in the proposed ASU represents the third model that was exposed by the FASB for comment. This model and the first model were included in FASB-only documents; the second model was a supplementary document published jointly with the IASB in January 2011. Through June 2012, the FASB and the IASB continued to jointly deliberate a ”three bucket” impairment model for financial assets. However, after constituents expressed significant concerns that the joint model could be difficult to understand, operationalise, and audit, the FASB decided to develop an alternative impairment model. Because the IASB did not receive similar feedback from its constituents they have tentatively decided to continue deliberations of the jointly developed model. The two Boards, however, are committed to joint redeliberations after receiving comments on their respective proposals. The IASB plans to issue its exposure draft on impairment in the first quarter of 2013.

The following table highlights some of the key similarities and differences between the FASB’s proposed model and the IASB’s current thinking:

SubjectFASB’s Proposed ASUIASB’s Tentative Decisions
Scope The proposed ASU applies to:
  • Financial assets measured at either amortised cost or FV-OCI.
  • Trade and lease receivables.
  • Loan commitments not measured at FV-NI.
Same as the FASB.
Recognition threshold

None. Impairment is based on expected (rather than incurred) credit losses.

However, the FASB does not require entities to record an impairment allowance for a FV-OCI financial asset if:

  • its fair value exceeds its carrying amount, and
  • the expected credit losses are deemed insignificant.

None. Impairment is based on expected (rather than incurred) credit losses.

The IASB does not provide an exception for FV-OCI financial assets.
Measurement Current expected credit losses (i.e., all contractual cash flows that the entity does not expect to collect).

For assets in the first category, 12-month expected losses.

For assets in the second category, lifetime expected credit losses.
Transfer criteria between categories Not applicable in CECL model. Only one measurement objective.

Transfer to lifetime expected credit losses when there has been significant deterioration in credit quality since initial recognition, taking into consideration the term and the original credit quality of the asset. For higher credit quality assets, lifetime expected losses would be recognised when the credit quality of those assets deteriorates to below "investment grade".

Transfer back to 12-month expected credit losses when transfer criteria no longer satisfied.

Presentation of impairment allowance Valuation allowance (i.e., contra asset). Same as the FASB.
PCI financial assets Follows CECL model. Impairment allowance represents current expected credit losses. Interest income recognition is based on purchase price plus the initial allowance accreting to contractual cash flows. The impairment allowance for PCI financial assets is always based on the change (from the original expectation at acquisition) in lifetime expected credit losses. Interest income recognition is based on initially expected (rather than contractual) cash flows.
Nonaccrual accounting An entity would be required to place a financial asset on nonaccrual status “when it is not probable that the entity will receive substantially all of the principal or substantially all of the interest.”
IFRSs do not currently contain a nonaccrual principle nor would the IASB’s proposed approach introduce one.   However, for assets that have deteriorated to being credit-impaired, interest income is based on the net carrying amount of the asset.
Write offs An entity would write off the carrying amount of a financial asset “if the entity [ultimately] has no reasonable expectation of future recovery.” 
Same as the FASB.

Click to view the news release (linking to the proposed ASU) on the FASB's website. Also see the related Deloitte (United States) Heads Up newsletter for more detailed information on the proposed ASU.

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