Disclosures about Credit Quality and the Allowance for Credit Losses
Last updated on September 24, 2010. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.
(Updated sections are indicated with an asterisk *)
The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.
*Project Objective and Summary
The objective of this project was to improve disclosures a creditor provides about the allowance for credit losses and the credit risks inherent in its portfolio of financing receivables (loans, finance leases and trade receivables with terms that exceed one year).
The improvements apply to all entities, including public and nonpublic business entities and not-for-profit organizations.
Read the FASB In Focus, which summarizes the Accounting Standards Update.
Listen to a webinar (approximately 25 minutes) recording of FASB Board member Tom Linsmeier discussing the Accounting Standards Update.
Due Process Documents
On July 21, 2010, the Board completed this project and issued Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.
On June 24, 2009, the Board issued a proposed Statement, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The comment period ended August 24, 2009.
The Board received 73 comment letters as of October 6, 2009. A summary of the comment letter responses prepared for the October 14, 2009, Board meeting can be found here.
Summary of Decisions Reached to Date
Board/Other Public Meeting Dates
The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.
|June 9, 2010||Board Meeting—Deliberations|
|April 28, 2010||Board Meeting—Deliberations and Permission to Draft|
|February 24, 2010||Board Meeting—Deliberations|
|October 14, 2009||Board Meeting—Deliberations and Comment Letter Summary|
|April 22, 2009||Board Meeting—Completion of Discussion of Proposed Disclosure Requirements and Other Issues like Effective Date|
|March 18, 2009||Board Meeting—Proposed Disclosure Requirements|
|January 30, 2007||Board Meeting—Agenda Decision: Allowance for Loan Losses|
FASB Statements No. 5, Accounting for Contingencies, and No. 114, Accounting by Creditors for Impairment of a Loan, provide the general principles a creditor should apply to account for impairment in financing receivable portfolios under U.S. GAAP. In providing for losses on loans, the overriding concept in GAAP is that impairment for losses should be recognized when, based on all available information, it is probable that a loss has been incurred based on past events and conditions existing at the date of the financial statements. Losses are not recognized before it is probable that they have been incurred (referred to as an incurred model), even though it may be probable based on past experience that losses will be incurred in the future.
In practice, it is difficult to identify the actual event that caused the incurred loss on a financing receivable or a pool of such receivables and, thus, the creditor typically recognizes impairment when the creditor receives information that an impairment is warranted. Identification of the event or events that trigger impairment of loans under Statement 5 is difficult, especially with respect to a homogenous pool of financing receivables. The adequacy of the analysis to determine an allowance for losses for a homogenous pool is largely dependent on the consistency and timeliness of individual account write-offs and adjustments for the estimated time lag between the incurred event and the write-off.
Statement 114 states that “a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.” Although it is easier to identify an event under this guidance than to identify an event or events for a homogenous pool of financing receivables, there may still be uncertainty in identifying the event that triggers the impairment recognition (such as a borrower losing a critical customer without the lender’s knowledge, as opposed to the borrower filing for bankruptcy, about which the lender can more readily learn).
Because the difficulty in applying Statements 5 and 114 has resulted in diversity in practice, the Board added a project to its technical agenda on January 30, 2007, to address disclosures related to the allowance for credit losses associated with financing receivables (loans, finance leases and trade receivables with terms that exceed one year).