Shortcomings in FASB’s Impairment Model Raised

Jack Humphrey, Regulatory journalist
April 05, 2011 /

Many issues have been omitted by the US Financial Accounting Standards Board (FASB) in its impairment model for accounting for financial assets and the proposal’s concept does not look ‘sound’.

This was the statement of the Financial Reporting Executive Committee (FinREC) of the American Institute of Certified Public Accountants (AICPA) in a letter addressed to FASB regarding its proposals for accounting for impairment of financial assets.

In mid February, global accounting and business consultancy firm, KPMG, issued parallel comments on the proposal. KPMG said there are still “elements” that FASB and IASB need to include in the proposal, though it could be expected that the impairment model would largely impact the banks applying them to their open portfolios.

The proposal was jointly published on January 31 with the International Accounting Standards Board (IASB) and was opened for public comment that ended April 1.

It will adopt a more forward-looking approach to credit loss accounting, which deviates from the incurred loss model used to account for credit losses through the International Financial Reporting Standards (IFRSs) and US generally accepted accounted principles (GAAP) that require evidence of a loss before financial assets can be written down.

FinREC expressed doubts that the proposal would be practicable, citing the short comment period that FASB and IASB provided for the respondents. It said it did not have enough time to provide adequate input.

“We do not support the full life expected loss model that was originally proposed. We believe that the incurred loss model for recognition of credit impairment should be retained since we believe losses should not be recognized until there is a triggering event,” the letter reads.

FinREC raised concerns that the proposal would significantly depart from the incurred loss model as per ASC 450, Contingencies (f/k/a FASB Statement No. 5).

FinREC urged FASB and IASB to issue a “revised comprehensive financial instruments Exposure Draft” addressing its “concerns and recommendations, as well as those of other commenters, on classification and measurement, impairment, and hedge accounting.”

Meanwhile, the AICPA wanted to push for a longer comment period to give commenters enough time to study the issues and enable them to give a more educated input to FASB’s proposal.


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