FASB Requires Expanded Disclosures on Credit Quality of Financing Receivables

July 22, 2010

FASB issued Accounting Standards Update (ASU) no. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses , which FASB said in a press release will improve transparency in financial reporting by public and nonpublic companies that hold financing receivables, which include loans, lease receivables and other long-term receivables.

 

“The global financial crisis highlighted the need for additional information about a company’s financial instruments, including loans and other financing receivables,” FASB Chairman Robert Herz said in the release.

 

The ASU requires companies to provide more information in their disclosures about the credit quality of their financing receivables and the credit reserves held against them.

 

FASB said this additional information will assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The ASU says that the current high threshold for recognition of credit impairments impedes timely recognition of losses. FASB recently issued an exposure draft of a proposed Accounting Standards Update, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities: Financial Instruments (Topic 825) and Derivatives and Hedging (Topic 815), that would remove that threshold.

 

The additional disclosures required under ASU 2010-20 for financing receivables include:

 

  • Aging of past-due receivables,
  • Credit quality indicators, and
  • Modifications of financing receivables.

 

The ASU requires a company to disaggregate new and existing disclosures based on how it develops its allowance for credit losses and how it manages credit exposures.

 

Short-term accounts receivable, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from the ASU.

 

For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after Dec. 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after Dec. 15, 2010. For nonpublic companies, the amendments are effective for periods ending on or after Dec. 15, 2011.

 

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