Impairment of financial instruments — FASB tentatively decides to develop alternative model

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03 Aug 2012

This week, in response to significant concerns expressed by constituents about the “three-bucket” impairment model jointly developed with the IASB, the US Financial Accounting Standards Board (FASB) directed its staff to explore an alternative model that (1) does not use a dual-measurement approach and (2) reflects all credit risk in the portfolio.

In its Summary of Board Decisions for the August 1, 2012, meeting, the FASB stated that this “approach would allow the Board to leverage several key concepts that have been jointly deliberated and agreed upon with the IASB, while at the same time creating an impairment model that is more understandable, operable, and auditable. . . . The FASB has [also] invited the IASB to monitor the deliberations on the alternative model [being developed by the FASB staff] and the FASB has committed to sharing their progress with the IASB early this fall.”
In describing the concerns that led to this decision, the FASB noted that “attempting to clarify the transfer notion1 and the Bucket 1 measurement concept2 may still result in a credit impairment allowance that is difficult for users to understand as a result of the dual-measurement approach in the three-bucket model.”


1 The joint model being developed by the FASB and IASB for the impairment of financial assets that are debt instruments requires entities to first place such assets (other than loans purchased with the explicit expectation of credit loss at initial recognition) into Bucket 1. Entities transfer these assets into either Bucket 2 or 3 when there is (1) a more than insignificant deterioration in the counterparty’s creditworthiness since initial recognition and (2) it is at least reasonably possible that some or all of the contractual cash flows may not be collected.

2 For financial assets in Bucket 1, an entity would use the joint impairment model to calculate an allowance that is equal to lifetime expected credit losses related to events expected to occur within the 12-month period after a reporting date that would give rise to the transfer conditions described in footnote 1. The entity measures the allowance for assets in Bucket 2 or Bucket 3 by using lifetime expected credit losses without the 12-month limitation.

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