See FASB's proposal ("Supplementary Document—Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities—Impairment") and the IASB's proposal ("Supplement to ED/2009/12 Financial Instruments: Amortised Cost and Impairment - Financial Instruments: Impairment").
The applicability and impact of the proposals, as noted in a joint press release issued by FASB and the IASB earlier today, would apply to, among other things, "impairment of financial assets such as loans managed in an open portfolio." The change in methodology represented in the proposal(s) vs. the current method of accounting for impairment of financial instruments, is described by the two accounting standards boards as follows:
At present, International Financial Reporting Standards (IFRSs) and US generallyIn announcing the release of the proposals, IASB Chairman Sir David Tweedie noted:
accepted accounted principles (GAAP) currently account for credit losses using an incurred loss model, which requires evidence of a loss (known as a trigger event) before financial assets can be written down. The boards have proposed moving to an expected loss model that provides a more forward-looking approach to how credit losses are accounted for, which they believe better reflects the economics of lending decisions.
A major complaint in the financial crisis was that when loan losses were recognized, it was a case of ‘too little, too late’. Such a situation highlighted the need for a more-forward looking approach to loan losses to ensure provisions are made much earlier than before. The proposed move to an expected loss model will address this issue, in addition to aligning IFRSs and US GAAP.FASB Chairman Leslie F. Seidman added:
The FASB and IASB have heard the urgent call for an improved, converged approach'Snapshot' Summaries, Podcasts/Webcasts Available
to impairment of debt instruments. We are keenly interested in whether investors think this revised approach provides relevant and timely information about credit losses, and whether reporting entities find the proposed requirements operational.
To enhance constituent's understanding of the proposals, each board has released a 'snapshot summary' (IASB 'snapshot summary' posted today; FASB 'In Focus' Summary forthcoming on http://www.fasb.org/).
Additionally, each board is holding podcasts/webcasts on the impairment proposals. IASB's interactive live webcast will take place on February 4; FASB's recorded podcast (January, 2011) featuring FASB board member Larry Smith speaking about the impairment proposal was posted earlier today.
The FASB-IASB's joint Financial Crisis Advisory Group, among others, had explored moving impairment standards from an 'incurred loss' to an 'expected loss' approach. See our earlier posts, EU's McCreevy, IASB's Smith, On Financial Reporting In A Changing World (May
8, 2009). See also: The Turner Review: U.K. FSA Recommends Response To Global Banking Crisis.
For public companies listed in the U.S., SEC reporting requirements must also be considered; see our earlier post, SEC's 'Dear CFO' Letter on MD&A Disclosure Of Loan Loss Provisions, ALLL' (August 18, 2009).
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