The FASB recently began discussing a revised impairment model for financial assets. At its September 7 meeting, the FASB made a key decision with respect to the impairment model by tentatively concluding that the current expected credit loss (CECL) model should apply to financial assets measured at fair value with changes in fair value recorded through other comprehensive income (FV-OCI). However, the FASB also decided to allow a practical expedient in applying the new model. This In brief article provides an overview of the FASB's discussions.
The FASB (the “board”) recently began discussing a revised impairment model for financial assets. At its September 7 meeting, the FASB made a key decision with respect to the impairment model by tentatively concluding that the current expected credit loss (CECL) model should apply to financial assets measured at fair value with changes in fair value recorded through other comprehensive income (FV-OCI). However, the FASB also decided to allow a practical expedient in applying the new model.
Over the past several weeks, the FASB has been developing a revised impairment model for financial assets, known as the CECL model. At each reporting date, the model would require an entity to recognize a credit impairment that reflects its current estimate of credit losses expected to be incurred over the life of the financial asset.
One of the remaining key decisions left to be made on the CECL model was whether the model should apply to debt securities and other financial assets measured at FV-OCI. At its most recent meeting, the FASB reached a tentative decision on this issue.
During the meeting, there was a significant amount of discussion and varying views expressed by the board members. Ultimately, the board voted 4-3 in favor of applying the CECL model to financial assets measured at FV-OCI and establishing a practical expedient for these assets.
The practical expedient would allow entities to not perform a detailed impairment analysis if both of the following conditions exist: (i) the fair value of the financial asset is greater than its amortized cost basis and (ii) the expected credit losses on the financial instrument are not significant.
If either of these conditions is not present, entities would be required to perform a full impairment assessment and, if appropriate, record a credit impairment to reflect the current estimate of expected credit losses.
The decisions reached to date on the CECL model do not result in convergence with the IASB’s model. At this stage, the IASB has not publicly discussed any of the recent FASB decisions and whether these decisions will affect its current plan to issue an exposure draft on the “three bucket” impairment model in the fourth quarter of 2012.
Over the next several weeks, the FASB plans to further discuss trade receivables, transition, and disclosure requirements. The FASB’s goal is to complete all significant discussions about the CECL model by the end of September. The FASB plans to share its revised model with the IASB at that time.What's the proposed effective date?
COSO currently plans to release final documents in the first quarter 2013. COSO has not specified an effective date or a transition period for adopting the Updated Framework. COSO expects that the Updated Framework will eventually supersede the Original Framework. Also, the Compendium will eventually supersede the Internal Control over Financial Reporting — Guidance for Smaller Public Companies issued in 2006. COSO plans to continue discussions with regulators and other stakeholders with respect to the transition period for the Updated Framework.
PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact the Financial Instruments team in the National Professional Services Group (1-973-236-7803).
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