In light of its new course on impairment, the Financial Accounting Standards Board will issue a new exposure draft of its planned credit impairment model separate from its proposals for financial instruments broadly.
FASB parted ways with the International Accounting Standards Board on developing an impairment model for expected credit losses when it heard feedback from U.S. constituents that the plan the boards were developing together would be unworkable. With IASB holding fast to its planned approach, FASB chose a different path and developed its own model, which it calls the “current expected credit loss” model. The changes are significant enough, FASB decided at a recent meeting, that it will issue a separate exposure draft on its impairment proposal. The board did not specify a time line.
The May 2010 proposal issued by FASB on financial instruments broadly covered classification and measurement of financial instruments, impairment, and hedging in a single package. The board is still working separately on classification and measurement and on hedging, but will expose those new proposals in a separate release.
FASB decided unanimously that it will apply its CECL model to all modified instruments, including troubled debt restructurings, without a new debate over TDRs specifically. The board issued new guidance in April 2011 largely in response to issues that arose in the credit crisis over how entities should determine whether a debt modification constitutes a TDR for accounting purposes. “If we were to reconsider TDRs at this point it would dramatically slow down our process,” said FASB member Larry Smith.
As such, the board agreed that the CECL model would apply in all cases where expected credit losses are based on an expected shortfall in the cash flows that are specified in a contract and where the expected credit loss is discounted using the interest rate in effect after the modification. FASB says to accomplish such accounting, it would need to modify existing guidance in Subtopic 310-40 of the Accounting Standards Codification to require that an entity executing a TDR would adjust the cost basis of the asset so the effective interest rate after the modification is the same as the original effective interest rate.
The board also decided it will propose a cumulative-effect adjustment to a company's statement of financial position when a company would adopt the new accounting and specify some transition disclosures to help users of financial statements understand the transition.