FASB continues to develop its alternative impairment model

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10 Sep 2012

Last week, the US Financial Accounting Standards Board (FASB) continued deliberating the current expected credit loss (CECL) model, its proposed impairment model for financial assets. The Board discussed (1) the need for a nonaccrual principle and (2) how the CECL model should be applied to debt securities and other debt instruments measured at fair value through other comprehensive income (FV-OCI).

Nonaccrual accounting

The Board tentatively decided to require nonaccrual accounting if “it is not probable that the entity will receive full payment of principal or interest (that is, when the entity can no longer assert that the likelihood of collection is probable).”1 The cost recovery method2 would be used if “it is not probable that the entity will receive full payment of principal.” In contrast, if the full payment of principal is probable, but the full payment of interest is not, the entity would apply the cash basis method3 to the nonaccrual asset.

Debt securities and other debt instruments measured at FV-OCI

The Board also tentatively decided that as a practical expedient, an entity would not be required to recognise an impairment allowance under the CECL model for financial assets classified as FV-OCI if such assets meet both of the following conditions:

  • The fair value of the financial asset is greater than its amortised cost basis.
  • The amount of expected credit loss is insignificant.

For more information about the FASB’s decisions reached to date on its alternative impairment model, see our earlier story.


1 See the Board’s summary of decisions for the September 7, 2012, meeting.

2 Under the cost recovery method, an entity records cash receipts first as a reduction to the carrying amount of the asset. Once the entity recovers the entire carrying amount, it then applies additional cash payments it receives to recover any previously written-off amounts of principal and records any excess as interest income.

3 Under the cash basis method, the entity recognises interest income as it receives cash payments. It then applies cash payments in excess of contractual interest to reduce the principal balance of the asset and records any excess as a recovery of previously written-off amounts of principal.

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