WASHINGTON (3/26/13)--In a new frequently asked questions (FAQ) document, the Financial Accounting Standards Board seeks to tackle common questions regarding its proposed accounting standards update on financial instrument credit losses.
The FAQ document addresses common questions posed by stakeholders about the credit loss accounting exposure draft, which is scheduled to remain open for public comment until April 30.
The document is divided into three sections: Project objectives, measuring expected credit losses, and other alternatives considered.
Questions addressed in the FAQ include:
- What is FASB's objective as it relates to the recognition of credit losses and interest income;
- Why does FASB believe that the effective interest rate is the best rate for recognizing interest income;
- What is the allowance for expected credit losses under FASB's proposed model; and
- Why didn't FASB propose a model that delays recognition of all expected credit losses until there has been a significant deterioration in the credit quality of the asset.
FASB's proposed model would utilize a single "expected loss" measurement for the recognition of credit losses. This would replace the multiple existing impairment models in U.S. generally accepted accounting principles (GAAP) that primarily use an "incurred loss" approach. Under the proposal, a credit union would estimate the cash flows that it does not expect to collect, using all available information, including historical experience and forecasts about the future. The proposed approach--referred to as the current expected credit loss model--considers more forward-looking information than is currently permitted under U.S. generally accepted accounting principles.
CUNA is developing a comment letter on this issue and will circulate that letter in the coming weeks.
FASB in a release said it will discuss feedback it receives on the credit loss issue this summer with the International Accounting Standards Board, which also has a proposal pending on this issue.
For the FAQ, use the resource link.