Project Updates
Loan Disclosures
Last Updated: April 10, 2008 (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.
Objective
Decisions Reached at the Last Meeting
Immediate Plans
Board Meetings/Public Meeting Dates
History and Background
*Contact Information
Objective
The objective of this project is to address disclosures related to the allowance for loan losses for financing receivables (loans and finance leases pursuant to FASB Statement No. 13, Accounting for Leases).
Decisions Reached at the Last Meeting
At its January 30, 2007 meeting, the Board decided to add a project to its technical agenda on disclosures related to the allowance for credit losses associated with financing receivables. The Board directed the staff to develop new disclosures and enhance current disclosures related to the allowance for credit losses including, but not limited to, information about credit quality in an entity’s portfolio, credit risk exposures, and potentially more transparency within an entity’s accounting policies.
Immediate Plans
The staff will reconsider all existing disclosure requirements for credit quality of financing receivables and the associated allowance and develop for Board consideration new disclosures related to the allowance for credit losses including, but not limited to, information about credit quality in an entity’s portfolio, credit risk exposures, and potentially more transparency within an entity’s accounting policies.
Board Meetings/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 Statement, Interpretation, or FSP.
| January 30, 2007 |
Board Meeting—Agenda Decision: Allowance for Loan Losses |
History and Background
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 on the date on which 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 adjusting the analysis 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 an event is identified under this guidance more easily than identifying an event or events for a homogenous pool of financing receivables, uncertainty may still exist 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
David Leverenz
Industry Fellow
dcleverenz@fasb.org
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