Financial reporting of credit losses on loans and other financial assets would move from an incurred-loss approach to an expected-loss approach under accounting rules FASB voted Wednesday to draft for issuance.
Current GAAP requires organizations to defer recognition of a credit loss until the loss is probable or has been incurred. The most recent global financial crisis resulted in calls for more timely reporting of credit losses on loans and other financial assets held by banks, lending institutions, and public and private organizations.
As a result, FASB and the International Accounting Standards Board (IASB) began a joint project to change financial reporting rules. Although both boards decided to issue standards that would reflect expected losses of credit rather than incurred losses, they settled on different models and could not agree on a converged standard.
The IASB introduced its expected-loss model in 2014 when it issued IFRS 9, Financial Instruments. The IASB’s standard takes effect for annual periods beginning on or after Jan. 1, 2018.
FASB also voted to defer its proposed effective dates by one year. Upon approval by the board of the ballot draft of the standard, FASB’s effective dates would be:
- For public companies that are SEC filers, fiscal years (and interim periods within those fiscal years) beginning after Dec. 15, 2019.
- For other public companies, fiscal years beginning after Dec. 15, 2020, including interim periods within those fiscal years.
- For private companies, not-for-profits, and employee benefit plans, annual periods beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021.
Early adoption will be permitted for all organizations for fiscal years beginning after Dec. 15, 2018, including interim periods within those fiscal years.
FASB expects the standard to be published in June. The board has created a transition resource group to analyze information from stakeholders arising from implementation of the standard and to inform FASB about those issues.
—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.
