The IASB has been deliberating a ‘three bucket’ impairment model, where financial assets would initially be placed in ‘bucket 1’, for which impairment losses would only be recognized for those assets expected to experience a loss event in the next 12 months. As credit risk deteriorates, assets would then move to ‘bucket 2’ or ‘bucket 3’, where impairment losses would be measured based on lifetime expected losses, irrespective of when the loss event is expected to occur. Key aspects of the ‘three bucket’ impairment model include determining whether a loss event is expected to occur in the next 12 months as well as the level of credit deterioration that requires a transfer of assets between buckets.
The project was meant to achieve convergence, but after consultation with its own constituents, the FASB has decided the IASB’s proposed model isn’t workable. Instead, it’s now going to develop a different solution all on its own, which it’ll then share with the IASB. Convergence in this area is critical to financial institutions and the Chair of the IASB has gone so far as to describe the prospect of the project’s collapse as an embarrassment to both Boards.