IASB’s financial instruments impairment proposal differs from FASB’s

In a convergence project that has experienced divergence, the International Accounting Standards Board (IASB) on Thursday published its proposed financial instrument impairment standard.

Although the IASB and FASB agreed that it is time to move from an incurred loss model to a more forward-looking expected loss model, they could not agree on a mechanism. The IASB’s exposure draft, Financial Instruments: Expected Credit Losses, is a simplified version of a model FASB originally agreed to, but retreated from because of stakeholder concerns.

The IASB’s proposal calls for an entity to calculate 12-month expected credit losses by multiplying the probability of a default occurring in the next 12 months by the total lifetime expected credit losses that would result from that default.

An entity would recognize 12-month expected credit losses from initial recognition until there has been a significant deterioration in credit quality or an increase in credit risk. At that point, lifetime expected credit losses would be recognized.

The IASB believes the proposal ensures better approximation of expected credit losses. The model also distinguishes between financial instruments that have significantly deteriorated in credit quality and those that have not.

“We believe the model leads to a more timely recognition of credit losses,” IASB Chairman Hans Hoogervorst said in a news release. “At the same time, it avoids excessive front-loading of losses, which we think would not properly reflect economic reality.”

Comments are due July 5 on the IASB’s proposal.

FASB’s model, proposed in a December ED, would require an organization to consider all available information rather than limiting its estimate to losses that are expected during a particular period. FASB Chairman Leslie Seidman has said FASB will examine the comments received on its model as well as the IASB’s model in hopes that the boards can ultimately come to a converged approach.

Hoogervorst said the IASB looks forward to receiving feedback on the proposals and moving swiftly to finalize the project to satisfy the G-20’s repeated requests. Both boards undertook the project to address the loan loss problems that have been cited as a reason for the recent financial crisis. The project aims to provide better reporting about expected credit losses on loans and other financial assets held by banks and other organizations.

The IASB and FASB also both have proposals in exposure for classification and measurement that would reduce key differences between the boards’ current standards in the multipronged financial instruments project. The IASB ED’s comment period ends March 28. Comments are due on FASB’s proposal May 15.

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