23 September 2011

FASB/IASB joint video conference board meeting minutes: Accounting for financial instruments - impairment

The Board meeting minutes are provided for the information and convenience of constituents who wish to follow the Board's deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings.

The IASB and the FASB continued to discuss a ‘three-bucket’ expected loss approach to the impairment of financial assets, which makes the maximum use of credit risk management systems.

The Boards discussed the feedback received from the initial outreach activities, in particular the operational challenges that would result from the requirement to classify all financial assets in Bucket 1 on initial recognition. The operational issues arise because current credit risk management systems do not typically store historical data, including origination data, in a way that is easily accessible for accounting purposes. To address these operational concerns, the Boards tentatively decided to classify financial assets within the buckets in accordance with their credit quality levels as of the reporting date.

The Boards recognised that such an approach would lead to day-one recognition of lifetime expected credit losses for financial assets classified outside Bucket 1. The Boards directed the staff to explore how to deal within the context of the model, with (1) purchased financial assets, including those purchased under a business combination, that are required to be initially measured at fair value; and (2) entities that primarily engage in origination of financial assets at lower credit quality levels.

The Boards discussed transfers of financial assets between the buckets and considered relevant feedback received in initial outreach activities. The Boards agreed that the transfer between the buckets should be based on a principle rather than on a bright-line. The Boards also agreed that the principle should reflect the point in time when the credit risk associated with the financial assets increases to the point that there is current significant uncertainty about the ability to collect contractual cash flows and the entity begins to manage the financial assets more actively because of the heightened credit risk.

Full paper

© FASB