FASB model for financial instrument impairment moves forward

Oct 18, 2012

FASB’s new model for impairment of financial instruments is clearing hurdles as the board continues on a different path than IASB on expected credit loss.

The revised credit impairment model FASB is developing will be re-exposed separately from tentative proposals on the classification and measurement of financial instruments, according to a summary of tentative board decisions.

FASB  tentatively decided to move forward with the “Current Expected Credit Loss” (CECL) model without broadly reconsidering the accounting for modifications.

Accordingly, FASB  tentatively decided that the CECL model would apply to all modified instruments, where expected credit losses are:

  1. Based on the expected shortfall in contractual cash flows (that is, the contractual cash flows to which the entity is legally entitled post-modification).
  2. Discounted using the effective interest rate post-modification.

To accomplish this, the guidance in Subtopic 310-40 would be amended to require that when an entity executes a troubled debt restructuring, the cost basis of the asset should be adjusted so that the effective interest rate post-modification is the same as the original effective interest rate, given the new series of contractual cash flows. The basis adjustment would be calculated as the amortized cost basis before modification less the present value of the modified contractual cash flows (discounted at the original effective interest rate).

Read more at fasb.org.