FASB takes new path in contentious financial instruments project

BY KEN TYSIAC
August 31, 2012

FASB is crafting a new expected credit loss impairment model in hopes of moving forward again in the joint accounting for financial instruments project the board is pursuing with the International Accounting Standards Board (IASB).

In July, IASB Chairman Hans Hoogervorst reacted with consternation when informed that FASB intended to take a step back from the so-called “three-bucket” impairment model in the project and address stakeholder concerns.

FASB Chairman Leslie Seidman vowed to move quickly to prevent the project from stalling. During an Aug. 22 board meeting, FASB made key decisions on an alternative impairment model, according to a summary of FASB decisions posted to the board’s website. FASB has invited the IASB to monitor the deliberations on the alternative model and plans to share its progress with the IASB early in the fall, a FASB document shows.

IASB spokesman Chris Welsh told the JofA that the IASB is continuing to work on the model that has been developed jointly with FASB, but will be following the progress of FASB’s additional analysis with interest. The IASB has targeted the fourth quarter of 2012 for publication of an exposure draft.

Although FASB had tentatively agreed to the “three-bucket” model with the IASB, stakeholder concerns about the understandability, operability, and auditability of that model, as well as whether it would measure risk appropriately, caused FASB to seek a different model.

The alternative approach is called the “Current Expected Credit Loss” (CECL) model, according to FASB’s summary. It retains several key concepts that have been jointly agreed upon with the IASB. These include the main concept of expected credit loss, and the current recognition of the effects of credit deterioration on collectibility expectations.

But there are differences, too, between the models. Unlike the three-bucket model, the CECL model uses a single-measurement objective—current estimate of expected credit losses—rather than the three-bucket model’s dual-measurement approach, FASB’s summary says. The dual-measurement approach, as described by FASB, requires a “transfer notion” to distinguish between financial assets that are required to use a credit impairment measurement objective of “12 months of expected credit losses” and those that are required to use a credit impairment measurement objective of “lifetime expected credit losses.”

Under the CECL model, an entity at each reporting date would reflect a credit impairment allowance for its current estimate of the expected credit losses on financial assets held. The estimate of expected credit losses is neither a “worst case” nor a “best case” scenario, but it reflects management’s estimate of the contractual cash flows that the entity does not expect to collect, according to FASB’s summary.

The credit deterioration or improvement reflected in the income statement under the CECL model described in FASB’s summary would include changes in the estimate of expected credit losses resulting from, but not limited to:

  • Changes in the credit risk of assets held by the entity.
  • Changes in historical loss experience for assets like those held at the reporting date.
  • Changes in conditions since the previous reporting date.
  • Changes in reasonable and supportable forecasts about the future.


The aim of these requirements described in FASB’s summary is to have the balance sheet reflect the current estimate of expected credit losses at the reporting date, while the income statement reflects the effects of credit deterioration or improvement that has taken place during the period.

Because the basic estimation objective is consistent from period to period, there is no need in the CECL model to describe a “transfer notion” that determines the measurement objective in each period as the three-bucket model does, according to FASB’s summary.

FASB is scheduled to hold further discussions Sept. 7 on impairment in the accounting for financial instruments project.

In July, Hoogervorst had said he would find it “deeply embarrassing” if the project unraveled and the boards could not arrive at an acceptable solution to impairment after three years and consideration of at least 10 alternatives. He said he hoped FASB would not let the project unravel.

The IASB has not met in August; its next scheduled meeting is Sept. 24–28.

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA senior editor.

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