FASB Splits with IASB on Impairment Standards

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The Financial Accounting Standards Board said it is taking a different approach than the International Accounting Standards Board in the impairment of financial instruments after a joint meeting Wednesday that ended in outspoken disagreement.

FASB noted that in the outreach it had conducted with various constituents and stakeholder groups, including U.S. regulators, they had expressed problems with the "expected loss" impairment approach previously agreed to by the boards. At the conclusion of the meeting, IASB chairman Hans Hoogervorst told FASB chair Leslie Seidman that he was worried the entire effort might unravel after three years of work and three separate attempts to get the standards right.

"If you go to your constituents with the message of “we’re so unsure, so unsure,” you’re going to get a lot more additional confusion, I am sure," he said. "I would also like to say that if this is going to unravel, I find it for us as standard setters, not just us, but also for you, I think it is deeply embarrassing, that in three efforts, in which we have looked at at least 10 alternatives in which we have left no stone unturned, after three years we’re still not able to come up with an answer. I would really find that unacceptable so I would really hope that when your staff does this outreach, that they do it with an attitude of getting things fixed and not to let it unravel."

The financial instruments project is one of the priority convergence projects for the two boards, and until Wednesday's meeting they appeared to be making progress, even though a final standard has been repeatedly delayed. The two boards announced last month that they had resolved a separate disagreement over the leasing standards, another priority project for the two boards (see FASB and IASB Resolve Disagreement over Lease Expenses). Wednesday’s meeting exposed another rift between the two boards, less than a week after the Securities and Exchange Commission issued a final staff report on International Financial Reporting Standards that seemed to throw into doubt the prospects for the SEC ever voting to support IFRS (see SEC Releases Staff Report on IFRS Work Plan and SEC Vote on IFRS Now Seems Pointless).

The objective of the financial instruments project is to develop a credit impairment model for loans and other financial assets held by reporting organizations, including banks, other financial institutions, and public and private companies.

Previously, the boards had agreed on a so-called “expected loss” approach, which would track the deterioration of the credit risk of loans and other financial assets in three “buckets” of severity (see IASB Sees Expected Loss Model Coming for Impairment). Under this model, organizations would assign to “Bucket 1” financial assets that have not yet demonstrated deterioration in credit quality. “Bucket 2” and “Bucket 3” would be assigned financial assets that have demonstrated significant deterioration since their acquisition.

FASB previously indicated that it would develop application guidance to supplement the expected loss principle. At Wednesday’s joint meeting with the IASB, however, FASB changed course. FASB staff reported that in conducting outreach with various stakeholder groups in the U.S.—including users, preparers, practitioners and regulators—questions had been raised about the application of the “Bucket 1” measurement objective of “expected losses relating to a loss event that is expected in the next 12 months.”

Some of the stakeholders expressed concern that, under the latest proposal from the two boards, reserves for loan portfolios might not reflect the appropriate amount of risk. For example, some stakeholders said they believe that the proposal would likely result in lower reserves for portions of loan portfolios. In addition, stakeholders raised questions about the proposed guidance for determining when financial assets should be transferred to “Bucket 2,” which requires an estimate of “lifetime expected losses.”

FASB indicated that before moving to an exposure draft of the proposed standard, the board plans to discuss at a future meeting several remaining topics, along with a summary of outreach conducted to date by the FASB staff on that application guidance. Accordingly, the FASB did not vote on the issuance of an exposure draft on impairment.

“As part of our due process, individual board members and staff members have met with a large number of U.S. preparers, auditors, users and regulators to discuss the boards’ preliminary conclusions on impairment and potential application guidance,” Seidman said in a statement. “The FASB staff has advised the board that pervasive questions have been raised in the U.S. about the appropriate interpretation of the proposal. The FASB still strongly desires to achieve a converged standard with the IASB on impairment; however, we believe it is essential that we address the questions that have been raised in the U.S. before moving forward with an exposure draft, so that we are confident that the proposal would result in an improvement in financial reporting.”

The two boards have resolved earlier disagreements in the financial instruments standards, in some cases by asking companies to disclose the different approaches. Last year, they agreed that companies should provide disclosures in their financial statements to “bridge the gap” between the offsetting or netting standards under U.S. GAAP and IFRS (see FASB, IASB Make Progress on Netting, Leasing and Impairment Standards). However, this is not seen as an ideal way to account for the differences.

At the conclusion of Wednesday's meeting, Hoogervorst expressed impatience, but said they would meet again Thursday to resume their deliberations. "All I want to say is that at a certain point you have to come to conclusions, and if we are not able to come to conclusions after three attempts and need yet another attempt, of which I can think of no other alternative ... then we really have done our job very poorly. OK, I think that’s enough. We’ll meet again tomorrow."

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