FASB Faces Challenges in Explaining Planned Credit Impairment, Loan Loss Rules

By Steve Burkholder The lay listener, lagging in comprehension at a meeting of accounting rulemakers, might be forgiven when the Financial Accounting Standards Board chief says he still gets confused in debates about a particularly complex set of scenarios unless he has the facts and circumstances laid out in print in front of him. That's what FASB Chairman Russell Golden said—with a measure of diplomacy—at a May 11 meeting of the board with its Investor Advisory Committee on the difficult topic of accounting for credit impairment. It includes banks' accounting for loan losses and the reserves created to weather losses if operating conditions get especially bad. With the forthcoming standard, FASB would shift away from current accounting's use of an incurred-losses principle. It would move to an expected-losses notion to try to prevent the kind of “too little, too late” reporting of impairments that came to bear in the financial crisis of 2008-09. The specific focus of the meeting was the board's planned prescription—its centerpiece “current expected credit loss” model, or CECL—and how it would be applied in a number of circumstances.  Those include when loans are originated and when they are purchased. Drilling down deeper, in the case of purchased loans, the examples also would show the application of the CECL model if such financial assets are “credit-impaired” or otherwise are marked by some degree of credit deterioration that may or may not be “more than insignificant.”Educational Task Ahead The debate and discussion at the meeting demonstrated that FASB faces a big educational challenge in having companies and investors understand how that accounting model will work. For some of the investors on the committee, the long-running project might appear to be a bit of a moving target. The discussion showed that members of the advisory committee weren't yet aware of recent changes in FASB's thinking on how to account for transactions involving purchases of loans with some, though possibly “more than insignificant” credit deterioration, and their effect on accounting for impairment. The changes give preparers of financial statements “a little more discretion” in thinking about what makes up the population of what are called “purchased credit-impaired assets,” a senior staff accountant at FASB said. FASB plans...

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