Project Update
Disclosures about Credit Quality and the Allowance for Credit Losses
Last Updated: March 10, 2010 (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
Due Process Documents
*Decisions Reached at the Last Meeting
*Summary of Decisions Reached to Date
*Next Steps
*Board/Other Public Meeting Dates
Background Information
Contact Information
Project Objective
The objective of this project is to improve disclosures a creditor provides about the allowance for credit losses and the credit risks inherent in its loan and lease portfolio.
The proposed improvements would apply to all creditors, including public and nonpublic business entities and not-for-profit organizations.
Due Process Documents
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.
Proposed Statement
Comment Letters
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.
*Decisions Reached at the Last Meeting (February 24, 2010)
The Board redeliberated the following issues related to the Exposure Draft, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses:- Definitions of portfolio segment and class of financing receivable
- Rollforward of the allowance for credit losses
- Rollforward of the carrying amount of financing receivables
- Disclosures about the credit quality of financing receivables
- Disclosures about modifications of financing receivables
- Fair value disclosures
- Scope
- Purchased credit impaired loans
- Loss contingency disclosure clarification
- Interim and annual reporting periods
- Effective date and transition
The Board decided to modify the definition of portfolio segment by removing the requirement to disaggregate portfolio segments based on impairment methodology. However, the Board decided to separately require an entity to disaggregate the ending balance of the allowance for credit losses based on impairment methodology. (See the decision on the rollforward of the allowance for credit losses.)
The Board decided to retain the definition of class of financing receivable as proposed, emphasizing that judgment will be required to apply that definition.
Rollforward of the allowance for credit losses
The Board affirmed its proposal that an entity should provide in the notes to the financial statements a rollforward of the allowance for credit losses by portfolio segment.
The Board decided that in addition to that rollforward, an entity would also be required to disclose, for each portfolio segment, the balance of the allowance for credit losses as of the reporting period date disaggregated based on impairment methodology and the related carrying amount of financing receivables. To disaggregate the required information based on impairment methodology, an entity should separately disclose amounts determined under FASB Accounting Standards Codification™ Subtopic 450-20, Loss Contingencies (generally includes items collectively evaluated for impairment), from amounts determined under Section 310-10-35, Receivables—Overall—Subsequent Measurement (generally includes items individually evaluated for impairment).
The Board decided not to require additional disclosure about partial chargeoffs of financing receivables by portfolio segment.
Rollforward of the carrying amount of financing receivables
The Board decided not to require disclosure of a rollforward of the carrying amount of financing receivables. Instead, the Board decided that a creditor would be required to disclose, by portfolio segment, the amount of any significant purchases of financing receivables during a reporting period separately from the amount of any significant sales of financing receivables during a reporting period.
Disclosures about the credit quality of financing receivables
The Board decided that an entity’s objective in providing credit quality disclosures is to provide information that enables a reader to understand how and to what extent management monitors the credit quality of its financing receivables on an ongoing manner.
The Board affirmed the proposed disclosure requirement in paragraph 13(b) of the Exposure Draft to provide quantitative and qualitative information about the credit quality of financing receivables. The Board decided, however, that to achieve the disclosure objective, an entity would be required to provide those quantitative and qualitative disclosures for all financing receivables, including financing receivables that are past due or impaired.
The Board decided to remove the proposed requirement to link internal risk ratings to external regulatory risk ratings. Rather, the Board decided to require a creditor who discloses internal risk ratings to also provide qualitative information on how those internal risk ratings relate to the likelihood of loss.
The Board also decided to expand the disclosures proposed in paragraphs 13(d) and 13(e) of the Exposure Draft so that they apply to all financing receivables, with one exception. Financing receivables deemed to be impaired under Section 310-10-35 (originally issued as FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan) would be excluded from the disclosures proposed in paragraphs 13(d) and 13(e).
The Board decided to remove the proposed disclosure requirement in paragraph 13(g) of the Exposure Draft, which would require an entity to reconcile certain amounts disclosed in the proposed Statement.
Disclosures about modifications of financing receivables
The Board agreed that the objective for disclosures about modifications of financing receivables is to provide information enabling the reader to understand the nature and extent of those modifications. The Board decided to reconsider specific disclosures about modifications of financing receivables at a future meeting.
Fair value disclosures
The Board decided to remove the proposed requirement to disclose the fair value of loan receivables by portfolio segment from this project. The Board intends to consider additional fair value disclosures in its project on accounting for financial instruments.
Scope
The Board decided to modify the proposed scope of this project by excluding the following:
- Financing receivables measured at fair value or the lower of cost or fair value
- Promises to give, regardless of term.
- Accounts receivable with contractual maturities of one year of less that arose from the sale of goods or services, except for credit card receivables
- Unfunded lending commitments.
The Board affirmed its proposal that the disclosure requirements would continue to apply to all entities.
Purchased credit impaired loans
The Board decided not to add specific disclosures for purchased credit impaired loans to this project.
Loss contingency disclosure clarification
The Board decided to specify that paragraphs 450-20-50-3 through 50-5 (originally issued as paragraph 10 of FASB Statement No. 5, Accounting for Contingencies) do not apply to recurring loss contingencies arising from a creditor’s normal estimation of its allowance for loan losses.
Interim and annual reporting periods
The Board affirmed its proposal that the final Update should be effective for both interim and annual reporting periods.
Effective date and transition
The Board decided that a public entity would be required to provide these disclosures beginning with interim and annual reporting periods ending after December 15, 2010. The Board decided to revisit the effective date for nonpublic entities at a future meeting.
Examples
The staff has updated the examples in the Exposure Draft to reflect decisions reached during today’s meeting. These examples are available on the FASB’s website .
Please note that these examples do not represent official positions of the Board, are not meant to be prescriptive, and do not represent required formats. They are provided solely for convenience of the FASB’s constituents who are following this project.
*Summary of Decisions Reached to Date (as of March 10, 2010)
The Summary of Decisions Reached at the last meeting (February 24, 2010) is included above.
On October 14, 2009, the Board discussed a summary of the comments received on the June 2009 Exposure Draft, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, and its plan for deliberations.
The Board decided to move forward with its plans to enhance disclosures about credit quality and the allowance for credit losses independently from its broad project on accounting for financial instruments. Before finalizing those disclosure enhancements, the Board will consider developments in the broader project to minimize the risk that the disclosures will become outdated soon after implementation.
For decisions reached prior to October 2009, please see the exposure draft. (Link above, in Due Process Documents.)
*Next Steps
At their February meeting, the Board asked the staff to do more work on three issues: disclosures about modifications of financing receivables, the inclusion of leveraged leases in the scope of the final Update, and the effective date for nonpublic entities. The Board is planning to discuss those issues at a future meeting.
A final Accounting Standards Update is expected to be issued in the second quarter of 2010.
*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.
| *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 |
Background Information
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 and finance leases).
Contact Information
Holly Barker
Project Manager
hhbarker@fasb.org
Melissa Maroney
Project Manager
mamaroney@fasb.org