Wednesday, April 22, 2009

FASB Wants Changes To Loan Loss Disclosures Effective This Year

At its board meeting earlier today, the Financial Accounting Standards Board agreed that its soon-to-be-released proposal on Loan Loss Disclosures should be effective this year (specifically, interim and annual reporting periods ending after Dec. 15, 2009).

Effective date of loan loss disclosures decided in contemplation of effective date of upcoming amendments to FAS 140, FIN 46R: Part of the rationale for requiring the new disclosures this year-end, as explained in paragraph 7 (and footnote 1) in today's board handout [additional explanatory info inserted by me in brackets which does not appear in board handout], is that:

"The staff believes it would be beneficial for the effective date [of the Loan Loss Disclosures Statement] to be prior to the proposed effective date for proposed Statement, Accounting for Transfers of Financial Assets, and proposed Statement, Amendments to FASB Interpretation No. 46(R) [Consolidation of Variable Interest Entities]." As noted in footnote 1 in the board handout: "The proposed effective date for these proposed Statements [i.e. the amendment of FAS 140 and FIN 46R] are as of the beginning of each reporting entity’s first fiscal year or first interim reporting period that begins after November 15, 2009."

The staff added, " the disclosures in this project will provide enhanced credit risk information related to the financial assets included in the scope of those two proposed Statements [i.e. the amendment of FAS 140 and FIN 46R]. Therefore, the staff recommends the proposed Statement be effective for interim and annual reporting periods ending after December 15, 2009."

FASB Technical Director Russell Golden also noted that the assets on the balance sheet will be different after the amendments to FAS 140 and FIN 46R come into effect as proposed in 2010.

NOTE: The effective dates listed above for the proposed amendments to FAS 140 and FIN 46R are as proposed for public comment last year; as is done in finalizing all proposed standards, FASB is expected to discuss at an upcoming board meeting the effective date of those standards (i.e. whether to reaafirm the effective date as proposed).

Next steps on loan loss disclosures: FASB staff plan to release the proposal on Loan Loss Disclosures in May for a sixty-day comment period, and currently expect a final standard to be issued by the end of September. Following are some highlights from today's meeting.

Disaggregated disclosures for fair value of loans: The board agreed that a creditor should be required to disclose the fair value of financing receivables on a loan portfolio segment basis. Although not outlined in today’s board handout, this issue was addressed as a carryover from prior discussions during the development of FSP 107-1 which requires interim disclosures of fair value of financial instruments.

Loan loss disclosures required: The following loan loss disclosures would be required on an interim and annual basis – as discussed at the March 18, 2009 board meeting - as noted in paragraph 5 of today’s board handout:
a. Loan Rollforward Schedule
b. Allowance for Credit Losses
c. Credit Quality Information
d. Past Due Financing Receivables
e. Impaired Loans
f. Nonaccrual Financing Receivables

Interim and annual: At its meeting today, the board agreed to change the current requirement for annual credit loss (loan loss) disclosures, to require disclosures on an interim and annual basis. In reaching this decision, staff noted (as shown in the board handout) that “many entities are required to disclose detailed credit risk information through quarterly regulatory filings.”

Effective date and transition: The board agreed at its meeting today that the proposed effective date for the proposed loan loss disclosures would be interim and annual reporting periods ending after December 15, 2009. [For example, for calendar year-end companies, effective this year-end.] The board also agreed the proposed standard would not require disclosures for earlier periods presented for comparative periods at initial adoption. However, in periods after initial adoption, the board agreed to require comparative disclosures for all earlier periods that ended subsequent to initial adoption.

Comment period: The board agreed to a 60-day comment period for this proposal.

Discussion About Systems Changes; Fatal Flaw Review
FASB Board Member Tom Linsmeier asked the staff, “What sort of systems changes do you think will need to be put in place” for companies to adopt the proposed loan loss disclosures.

Project Manager Melissa Maroney responded that a great deal of the information in the proposed standard is already required for regulatory reports, and “a lot is built on how the loan loss (provision) is calculated.” She added, “We wrote the [proposed standard] to minimize the amount of system changes that would be needed.”

FASB Chairman Robert Herz, referencing bank regulatory reports (‘Call Reports’), observed that this information may be “required in Call Reports, but there are probably a lot of people that have big lending operations that are not filing Call Reports,” adding “that’s a whole other issue…”

FASB Board Member Leslie Seidman emphasized, “It’s really important that [the] fatal flaw [review] include some banks as reviewers, and maybe a nonbank too.” [NOTE: The fatal flaw review is standard procedure whereby before the board votes by written ballot to issue a proposed or final standard, the draft is sent out to external reviewers for a ‘fatal flaw’ review, and issues raised are addressed in final drafting, with significant issues brought back to the board.]]

Staff indicated they had done such outreach, and FASB Technical Director Russell Golden said staff would “find another large manufacturer” with a financing business to reach out to during the fatal flaw review.

As always, look for the official Summary of Board Decisions in FASB’s News Center, generally posted the same-day or next-day following board meetings.

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