At its October 4, 2017, meeting, the FASB discussed the estimated life of a credit card receivable when estimating expected credit losses. Specifically, the Board discussed how an entity should consider estimated expected future payments on a credit card receivable. These clarifications were made as a result of the FASB’s credit losses transition resource group (TRG) discussion held on June 12, 2017.¹

ASU 2016-13² requires entities to determine the allowance for loan losses on financial assets on the basis of management’s current estimate of expected credit losses on financial assets that exist as of the measurement date. Regardless of the method entities use to estimate expected credit losses, they must carefully consider all amounts expected to be collected (or not collected) over the life of the financial asset. Given the revolving nature of credit card lending arrangements, stakeholders have questioned how credit card issuers should determine the life of a credit card account balance so they can estimate expected credit losses.

Estimating the Amount of Expected Future Payments on Credit Card Receivables

The Board discussed and agreed on two potential methods entities may use to determine estimated expected future payments on credit card receivables:

• “Include all payments expected to be collected from the borrower.”
• “Include only a portion of payments expected to be collected from the borrower.”³

The FASB discussed the flexibility ASU 2016-13 gives to entities when developing appropriate methods to estimate expected credit losses. As a result, the Board clarified that using either method to estimate future payments is acceptable and that an entity should consistently apply the selected method to similar facts and circumstances. The Board also acknowledged that an entity may use other methods to estimate future payments. Lastly, the Board stated that the determination of the appropriate method an entity will use to estimate the amount of expected future payments is separate from the determination of how to allocate the future payments to credit card balances.⁴

Next Steps

The FASB announced that the clarifications above would be included as an addendum to the June 12 meeting summary (TRG Memo 6) published on August 25, 2017. The FASB indicated that no additional inquiries have been submitted to the TRG for consideration

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1 See Deloitte’s June 2017 TRG Snapshot for more information.

2 FASB Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments.

3 Refer to the tentative Board decisions posted on the FASB’s Web site.

4 At the June 2017 TRG meeting, TRG members discussed whether estimated future principal payments should be allocated to only the measurement-date credit card balance or whether future payments should also be applied to anticipated future cardholder draws. See further discussion within the TRG’s meeting minutes previously published on August 25, 2017 (TRG Memo 6).