In our comment letter on the FASB's proposed Accounting Standards Update, Financial Instruments-Credit Losses (Subtopic 825-15), we do not express support for the FASB's proposed standard.
The FASB's proposed model requires recognition of the full lifetime of expected credit losses upon origination or acquisition of a financial asset. This results in a "day 1 loss" on assets originated or purchased at market terms. As the transaction price contemplates the expected losses present at origination or purchase, we believe that recognition of a day 1 loss for the full lifetime of expected credit losses through the P&L does not accurately reflect the economics of lending transactions.
We believe that a threshold should be met before recording the full lifetime of expected credit losses. The IASB model contains a threshold based on significant credit deterioration. While we generally support this concept in the IASB model, we believe the IASB model requires clarification to address significant deteriorations in credit that have occurred but are not yet identifiable on an individual asset basis.
We believe that the proposed IASB model represents a good platform for the boards to resume collaboration on a converged model. We believe that the proposed IASB model, with the additional clarifications described above, results in a model that successfully achieves the principles established by the G20 subsequent to the financial crisis, primarily the need to establish a model that is based on expected losses, allows entities to look forward into future periods, and results in more timely recognition of credit losses.