Proposed New Credit Loss Model

Carl Chatto, Managing Principal
December 2012

On December 20, the Financial Accounting Standards Board (FASB) issued for public comment its proposal to improve financial reporting about expected credit losses on loans and other financial assets held by banks, financial institutions, and other public and private organizations. Proposed Accounting Standards Update, Financial Instruments—Credit Losses (Subtopic 825-15), proposes a new accounting model intended to require more timely recognition of credit losses, while also providing additional transparency about credit risk.

Stakeholders are asked to review and provide comments on the proposal by April 30, 2013. The FASB’s proposed model would utilize a single “expected credit loss” measurement objective for the recognition of credit losses, replacing the multiple existing impairment models in U.S. GAAP, which generally require that a loss be “incurred” before it is recognized. Under the proposal, management would be required to estimate the cash flows that it does not expect to collect, using all available information, including historical experience and reasonable and supportable forecasts about the future.

The FASB has not established an effective date for implementation.

The Exposure Draft (which is 158 pages), including instructions on how to submit written comments, is available at www.fasb.org.

This proposal could significantly affect the way banks, credit unions and all lenders determine their allowance for losses on loans. BNN will keep you informed as this proposal evolves.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.  If you would like to discuss these matters further, please call Carl Chatto or your usual BNN professional at 1.800.244.7444.

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