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FASB Seats Transition Group for Impairment, Not Leases

Tammy Whitehouse | December 10, 2015

The Financial Accounting Standards Board is forming a “transition resource group” to facilitate implementation of the pending standard on financial instrument impairment, but doesn’t see the need for a similar groups to help steer adoption of rules expected soon on lease accounting or classification and measurement of financial instruments.

Golden-russ-0814In remarks at a national accounting conference on regulatory issues, FASB Chairman Russ Golden said the newly formed TRG on impairment has already met under the leadership of FASB member Larry Smith to begin identifying significant issues that FASB will need to address. The board is putting the finishing touches on the standard, which will require companies to reflect an expected lifetime loss on a given instrument at the outset. The final standard is expected in early 2016.

In steering implementation of the enormous new standard on revenue recognition, FASB found great success in the transition resource group process, said Golden. “FASB has experimented with different ways of handling implementation issues in the past, but we believed the formation of this group, jointly with the International Accounting Standards Board, would be the best way forward,” he said. “As it turns out, I think we were right.”

High on FASB’s agenda with the impairment TRG will be addressing “misinformation” on the impairment standard, said Golden. Confusion seems most rampant, he said, around the level of effort companies will have to put forth to comply with the new forward-looking impairment model. “In the underwriting process, most banks, including small community banks, already make some kind of assessment of lifetime loss,” he said. “I would find it very surprising to learn that any lending institution is not already making some type of assessment.”

The board also wants to address misinformation, as Golden called it, around whether the the standard forces an unrealistic view of the economics of loan financing. “The FASB simply wants banks to reflect the true economics of their loans,” he said. “We know, and they know, there are losses associated with loans.”

While the changes to credit impairment are significant enough to warrant a transition resource group, the change with the new lease accounting standard should not be as complex for companies to digest, said Golden in talking with members of the media at the conference. “We felt there likely could be more impairment questions and a need to better educated stakeholders in impairment than that of leases,” said Golden. “In leases, the fundamental change we’re making is putting the obligation on the balance sheet, but we are not changing the income statement.”

FASB also expects to soon issue its final standard on the classification and measurement of financial statements, and that standard also is not expected to require the implementation assistance of a transition resource group, said Golden. “Equities will have to be fair valued, and that may be challenging or new for companies to create processes for fair valuing those,” he said. “But as far as educating on what you fair value, what you don’t, we don’t view that as a significant issue.”

Golden said FASB provided some long lead times for the new standards compared with the effort they might require individually to be implemented. That’s because the board recognizes the revenue recognition standard will consume plenty of time and attention in the meantime. Standards on revenue recognition and the classification and measurement of financial instruments both take effect in 2018, while those on impairment and leasing follow in 2019. “I was considering what time companies would need following implementation of revenue,” said Golden. “Most companies that are working on revenue recognition will have lease activity.”