The Financial Accounting Standards Board has voted to extend the comment deadline for a much-debated proposal on credit losses and loan impairments.
The proposal aims to improve financial reporting about expected credit losses on loans and other financial assets held by banks, financial institutions, and other public and private organizations. Both FASB and the International Accounting Standards Board have been trying to converge the standards as part of their financial instruments project, but have not yet been able to agree on a common approach (see
The decision was made in response to requests from various stakeholders for more time to consider FASB’s proposals on credit losses as well as the related staff “Frequently Asked Questions” document that was issued earlier this week (see
“The FASB decided to extend the comment period on its credit losses proposal in response to stakeholders’ requests for more time to consider this important issue,” said FASB chair Leslie F. Seidman in a statement. “Given our strong desire for a converged standard, the FASB encourages stakeholders to also consider the proposal issued by the IASB, which differs in some respects, and to share your views on the appropriate path forward.”
FASB’s proposed model would use a single “expected credit loss” measurement objective for the recognition of credit losses, replacing the multiple existing impairment models in U.S. GAAP. The current models generally require that a loss be “incurred” before it is recognized. Under FASB’s proposal, management would be required to estimate the cash flows that it does not expect to collect using all available information, including historical experience and reasonable and supportable forecasts about the future.
Both the FASB and IASB models would require that expected credit losses be estimated based on past events, current conditions, and reasonable and supportable forecasts about the future. The amount of credit loss that is ultimately recognized would be the same under both models.
The difference between the models relates to when losses that are currently expected would be recognized. Under the FASB model, an entity would record its current estimate of expected credit losses every period. The IASB model would record a portion of the expected credit losses until significant credit deterioration has occurred, at which point the full estimate of expected credit losses would be recognized.
FASB said it would consider the comments received on its proposal as well as the comments received by the IASB on its proposal.
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