Financial reporting / International

  FASB released an expected credit loss proposal that is likely to differ from the approach to be recommended by the International Accounting Standards Board (IASB).

But FASB Chairman Leslie Seidman said she has not given up on the idea of convergence in the project, which involves impairment of financial instruments and would require recognition of credit losses that are expected rather than previous guidance that calls for recognition when losses are incurred. Seidman encouraged global stakeholders to comment on FASB’s exposure draft and the one the IASB is scheduled to release in the first quarter of this year.

Seidman said that because the comment periods will overlap, FASB plans to review feedback on both the FASB and IASB proposals. And she said both boards have made progress by proposing approaches focused on expected rather than incurred losses.

“If you roll the clock back a couple of years ago where we were really divided on this approach, the FASB model looked nothing like the IASB approach,” Seidman said during a conference call with reporters. “We have come a lot closer together. … I think that we are now at least both looking at an expected loss approach, and I think with the benefit of an additional round of commentary, we will be in a better position to ultimately come to a converged approach that people around the world view as an improvement.”

IASB spokesman Mark Byatt said the IASB continues to cooperate with FASB on the project and intended to publish a proposal for public comment in the first quarter of 2013 based on a simplified version of the expected credit loss method FASB originally had agreed to.

The project undertaken by both boards was designed to address the loan loss problems that helped lead to the recent financial crisis. The objective was 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.

FASB said its proposal, which is available at and seeks public comment through April 30, would require more timely recognition of credit losses, while providing additional transparency about credit risk.

The Proposed Accounting Standards Update, Financial Instruments—Credit Losses (Subtopic 825-15), is the result of an effort that began as a convergence project with the IASB, but has seen differences emerge. Both boards are moving away from the current incurred loss approach to an expected loss approach that calls for current recognition of the effects of credit deterioration on collectibility expectations.

But the expected loss model FASB has proposed differs from the one the IASB is developing, which is called the “three-bucket” model. Although FASB initially agreed to the three-bucket approach, concerns from stakeholders caused FASB to reconsider and develop its current expected credit loss model.

The IASB’s model uses a different expected loss approach than FASB’s model for assets that have not yet displayed significant deterioration in credit risk. Full recognition of an allowance for the expected credit loss would be deferred for financial assets whose loss event is expected to occur beyond 12 months from the date of the financial statement, according to a FASB news release. Seidman said practitioners, investors, and other stakeholders told FASB that they were confused by that approach. She said a few even said, if implemented, the model would have lowered reserves and therefore would not accomplish the project’s objective.

  The IASB plans to complete a new conceptual framework by September 2015.

In addition, the board plans to have its technical program focus on implementation and maintenance, including post-implementation reviews and a small number of IFRS projects.

The IASB announced that it has mapped its future plans after reviewing more than 240 comment letters in response to a consultation document it published in July 2011. The plans are included in a 40-page feedback statement released by the IASB, available at

Respondents to the consultation document advised the IASB to:

  • Have a period of relative calm after 10 years of almost continuous change in financial reporting.
  • Prioritize work on the conceptual framework. This was one of the recommendations of the comment letter submitted by the AICPA Financial Reporting Executive Committee.
  • Make targeted improvements that respond to the needs of new adopters of IFRS.
  • Pay greater attention to the implementation and maintenance of standards.
  • Improve the way it develops new standards, with more rigorous cost/benefit analysis as well as problem definition earlier in the standard-setting process.

A joint conceptual framework project undertaken by the IASB and FASB was suspended in 2010 to allow the boards to focus on high-priority, standards-level projects. The remainder of the IASB’s conceptual framework project will not be run jointly with FASB.

An important step in the building of a new conceptual framework will come when the IASB publishes a discussion paper on the topic in June.


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