The Financial Accounting Standards Board has voted to proceed with issuing a long-awaited standard in June on credit losses on loans and other financial instruments, a key component of its financial instruments convergence project with the International Accounting Standards Board, and to defer the effective date for one year.
FASB and the IASB diverged somewhat in their approach to recognizing credit losses on loans, and the IASB finalized its financial instruments standard, IFRS 9, in 2014 (see IASB Releases Its Own Financial Instruments Standard). FASB released another component of the financial instruments project, a standard on financial instruments recognition and measurement, this past January (see FASB Issues Standard for Financial Instruments and Recognition). FASB expects to publish the final accounting standards update on credit losses in June 2016.
At a meeting Wednesday, the board decided to defer the original effective dates by one year to the following:
• For public companies that meet the definition of a Securities and Exchange Commission filer, the upcoming standard will be effective for fiscal years (and interim periods within those fiscal years) beginning after Dec. 15, 2019.
• Other public companies will be required to apply the guidance for fiscal years beginning after Dec. 15, 2020, including interim periods within those fiscal years.
• For private companies, not-for-profit organizations, and employee benefit plans, the standard will be effective for annual periods beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021.
• Early adoption will be permitted for all organizations for fiscal years beginning after Dec. 15, 2018, including interim periods within those fiscal years.
FASB also voted to provide practical and transitional relief for certain organizations disclosing vintages.
FASB previously deferred the effective dates of its converged revenue recognition standard by one year, although the dates are still earlier than for the new credit loss standard.
The next step is for the FASB staff to complete a “ballot draft” of the credit loss accounting standards that includes all of the board’s final decisions. The ballot draft will be shared with each of the seven board members, who will review it to ensure that it accurately reflects the decisions made throughout their public deliberations. When FASB is satisfied that the ballot draft reflects its intentions, the draft will be submitted to production for final publication.
The global financial crisis highlighted the need for more timely reporting of credit losses on loans and other financial assets held by banks, lending institutions, and public and private organizations. Current U.S. GAAP accounts for credit impairment using an “incurred loss” approach, which requires recognition of the credit loss to be deferred until the loss is probable (or has been incurred). Many have argued that the incurred loss approach fails to alert investors about credit losses in a timely manner.
The decision to issue the final standard followed extensive stakeholder outreach. FASB said it received more than 3,360 comment letters on a 2010 exposure draft and a 2012 exposure draft of the proposed standard. FASB participated in more than 95 meetings with financial statement preparers; and hosted 8 public roundtables, and 15 preparer workshops. In addition, the FASB met with more than 200 users of financial statements.
The final standard is expected to be published in June, giving preparers enough time to review and prepare for the changes by the effective dates.
FASB has also decided to set up a Transition Resource Group for the new credit losses standard, at the urging of SEC chief accountant James Schnurr, to work on implementation issues for the new standard, similar to the joint Transition Resource Group set up by FASB and the IASB for the revenue recognition standard (see FASB Sets Up Transition Group for Credit Loss Standard). However, the group will only be for FASB’s version of the standard for U.S. GAAP and not the IASB’s, which takes a different approach to recognizing credit losses under International Financial Reporting Standards.
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