In brief: FASB decides to explore a revised impairment model for financial assets (No. 2012-32)

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Over the past several months, the FASB and IASB have jointly deliberated a proposed "three bucket" impairment model for financial assets. After recently announcing its intent to further discuss key aspects of the model, the FASB met on August 1 to discuss the next steps for the project. After considering the results of outreach efforts and constituent feedback, the FASB unanimously agreed with concerns that aspects of the "three bucket" impairment model are complex and difficult to understand. As a result, the FASB will not move forward with an exposure draft on the "three bucket" impairment model and will instead explore a revised approach. This In brief article provides an overview of the key issues and what's next.

What's new?

Over the past several months, the FASB and IASB have jointly deliberated a proposed “three bucket” impairment model for financial assets. After recently announcing its intent to further discuss key aspects of the model, the FASB (the “board”) met this morning to discuss the next steps for the project.

After considering the results of outreach efforts and constituent feedback, the board unanimously agreed with concerns that aspects of the “three bucket” impairment model are complex and difficult to understand. As a result, the FASB will not move forward with an exposure draft on the “three bucket” impairment model and will instead explore a revised approach.

What are the key issues?

Under the “three bucket” impairment model, financial assets would initially be placed in “bucket 1,” where credit reserves would be established for only those assets expected to experience a loss event in the next twelve months. As credit risk deteriorates, assets would then move to “bucket 2” or “bucket 3,” where credit reserves would be based on a lifetime of 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 twelve months, and the level of credit deterioration that requires a transfer of assets between buckets. Clearly defining these concepts proved to be difficult and raised concerns as to the understandability, operability, and auditability of the model.

The board considered whether implementation guidance could adequately clarify the objectives of the model. The board concluded that even with improved definitions for the key terms, there would likely still be concern over whether the model results in credit reserves that faithfully represent the credit risk of the portfolio. As a result, the board directed its staff to explore a model that incorporates the concept of expected losses, but applies that concept to all financial assets held and uses a single measurement approach.

Is convergence achieved?

The FASB's decision to explore a revised approach could result in an impairment model that differs from the IASB’s model. During today's discussion, certain IASB members indicated that they have heard much less concern about the ”three bucket” impairment model and therefore, plan to move forward with that approach.

What's next?

The board directed its staff to develop the new model and is hopeful that the staff will be able to leverage the discussions held to date in that process. Discussions of the new model are expected to take place over the next several weeks. The FASB plans to share its findings with the IASB in early fall.

It is unclear at this time whether the IASB will move forward with an exposure draft in the near term, or whether the IASB will first consider any revised proposals from the FASB.

Questions?

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).

Authored by:

John Althoff
Partner
Phone: 1-973-236-7021
Email:john.althoff@us.pwc.com

Christopher Gerdau
Partner
Phone: 1-973-236-5010
Email:christopher.gerdau@us.pwc.com

Christopher Rickli
Senior Manager
Phone: 1-973-236-4576
Email: christopher.rickli@us.pwc.com

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