• The Financial Accounting Standards Board Continues to Debate Final Asset Write-Down Rules
  • June 1, 2015
  • Law Firm: Jones Walker LLP - Washington Office
  • In May 2015, the Financial Accounting Standards Board ("FASB") held a meeting of its Investor Advisory Committee ("IAC"). Panel members of the IAC told the FASB that a final standard for asset write-downs will improve disclosure if final rules require financial institutions to provide footnotes in their financial statements that disclose how institutions calculate estimated losses.

    The IAC has pushed for detailed disclosure around estimated credit losses in an effort to better assess credit deterioration and an institution's prospects for improvement.

    The proposed standard originated in the FASB's December 2012 Proposed Accounting Standards Update (ASU) No. 2012-260, Financial Instruments—Credit Losses (Subtopic 825-15) and is intended to ensure earlier loan and security loss recognition. The FASB wants banks and other financial institutions to estimate expected losses, a departure from current U.S. GAAP, which requires writedowns after the loss is already apparent.

    Under the proposed rules, a business is supposed to use "reasonable and supportable" forecasts to make estimates about future losses and set aside reserves to cover potential losses.

    The FASB differentiates between calculating losses for originated loans versus loans that are purchased at a discount due to declining credit quality. Under the 2012 proposal, purchased credit impaired ("PCI") assets were defined as an individual asset or group of assets with shared risk characteristics that have experienced "significant credit quality deterioration" since origination. Because the potential for credit losses is considered to be factored into the calculation of the assets' fair value, the purchase price would be adjusted to reflect the expected credit losses. The FASB has stated that there would be no loss recognized in the income statement at the time of purchase.

    In April, a majority of the FASB agreed that instead of "significant deterioration," PCI assets would be defined as those that have experienced "more-than-insignificant deterioration." FASB members told the IAC that this change was in part a response to concerns from investors that "significant deterioration" was too high a threshold, and few loans would qualify as purchased credit impaired. Several members of the IAC expressed concern about differentiating between the two types of loans.

    The FASB Chairman Russell Golden said the board will develop examples that outline how to account for an originated loan, a purchased loan with no mark-down, a purchased loan with an "insignificant" credit impairment, a purchased loan with a more-than-insignificant credit impairment, and a purchased loan that shows signs of both significant and insignificant impairment.

    In addition, Golden said the FASB planned to meet privately with investors to discuss disclosures about credit quality of banks' assets, classified by age of loans and securities. In the April letter to the FASB, the IAC members said information regarding asset vintage is critical to analysts.

    The letter stated "this disclosure should include reserve data by vintage and class which reconciles to the total allowance for loan losses. Companies should also be required to provide information within the financial statement footnotes explaining changes to the allowance by vintage and class, detailing the specific type of lending impacted, and the potential for future changes to current reserve levels."

    The May 2015 investor meeting highlighted challenges the FASB faces in developing a new credit impairment standard. Investors, analysts, and businesses generally agree that the FASB should require earlier recognition of loan losses, but no consensus has emerged as to the best approach.