FASB Makes Decisions About Disclosures About Credit Quality and the Allowance for Credit Losses

Published on: 25 Feb 2010

Yesterday, the FASB redeliberated issues related to the proposed standard, Disclosures About the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The Board decided to modify the effective date for public entities, changing it to interim and annual reporting periods ending after December 15, 2010. Accordingly, for calendar-year-end entities the additional disclosures would be required for next year’s annual reporting season. A decision about the effective date and transition for private entities will be made at a future meeting. The FASB has tentative plans to publish the final statement by the end of April 2010. (Note that conclusions of the FASB are subject to change at future meetings and generally do not affect current accounting requirements until an official position (i.e., an ASU) is issued. Official positions are determined only after extensive deliberation and due process, including a formal vote.)

At the meeting the Board also decided to do the following:

  • Scope
    • Exclude from the scope of the proposed standard financing receivables measured at (1) fair value or (2) lower of cost or fair value.
    • Continue to include finance leases in the scope, but discuss at a future meeting whether, after the staff researches this issue in more detail, to include leveraged leases in the scope.
    • Exclude from the scope all unconditional promises to give (regardless of their term).
    • Continue to exclude from the scope trade receivables with maturities of less than one year, except for credit card receivables.
    • Continue to exclude unfunded lending-related commitments.
    • Continue to require disclosures for all entities (i.e., public and all nonpublic entities).
  • Key Terms
    • Definition of “portfolio segment” and requirement to further disaggregate the disclosures by portfolio segment based on impairment methodology — The Board modified the definition of a portfolio segment to require an entity to only disaggregate allowance balances and corresponding receivables balances by portfolio segment based on impairment methodology as of the end of the reporting period.
    • Definition of “class of financing receivable” — The Board retained a definition of “class of financing receivable” and clarified that the determination of class is based on management judgment.
  • Disclosures
    • Rollforward of the allowance for credit losses — The Board retained the requirement to disaggregate the rollforward of the allowance for credit losses by portfolio segment. As noted above, the Board decided to only disaggregate allowance balances by portfolio segment based on impairment methodology as of the end of the reporting period. An entity would disclose amounts determined under ASC 450 (financing receivables collectively evaluated for impairment) separately from amounts determined under ASC 310-10-35 (financing receivables individually evaluated for impairment).
    • Partially charged-off loans — The Board decided to not require qualitative and quantitative disclosures about partial charge-off of financing receivables.
    • Rollforward of the carrying amount of financing receivables — The Board decided to not require a rollforward schedule of the carrying amount of financing receivables by portfolio segment and instead, require an entity (1) to disclose the carrying amount of the financing receivable balance as of the end of each reporting period disaggregated by portfolio segment and (2) to separately disclose significant purchases and sales of financing receivables during a reporting period by portfolio segment.
    • Disclosures about the credit quality of financing receivables— The Board decided to:
      • Modify the credit quality disclosures from the proposed statement to clarify that the disclosures should be based on how and to what extent a creditor monitors and updates the credit quality of its portfolios in an ongoing manner.
      • Require a creditor who discloses internal risk ratings to also provide qualitative information on how those internal risk ratings relate to the likelihood of loss and remove the requirement to link internal risk ratings to external regulatory risk ratings.
      • Require a creditor to disclose credit quality indicators for its entire portfolio that are monitored on an ongoing basis rather than limiting those disclosures to only those assets that are neither past due nor impaired (i.e., performing assets).
      • Modify the past due disclosures to apply to all financing receivables unless financing receivables are deemed impaired under ASC 310-10-35.
      • Retained the proposal that credit quality disclosures be provided by class.
      • Remove the requirement to reconcile amounts disclosed pursuant to the credit quality disclosure requirements to the allowance for credit losses for collectively impaired financing receivables by portfolio segment.
    • Modifications of financing receivables — The Board decided to include disclosures about modifications of financing receivables to provide information enabling users to understand the nature and extent of those modifications. It also decided to consider in more detail the disclosures about modifications of financing receivables at a future meeting.
    • Fair value disclosures — The Board decided to not require fair value disclosures by portfolio segment in the final ASU. Additional fair value disclosures will be considered in the project on accounting for financial instruments.
    • Loss contingency disclosure clarification — The Board clarified that the requirement to disclose the possible loss or range of loss does not apply to recurring loss contingencies arising from a creditor’s normal estimation of its allowance for loan losses.
    • Purchased credit impaired loans — The Board chose to not require disclosures applicable only to purchased credit impaired loans.

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