Community Bankers of Iowa Monthly Banker Update January 2014 | Page 12

Adverse Accounting

Written By: James Kendrick, ICBA Vice President-Accounting and Capital Policy

FASB looks to alter impairment accounting to impractical expected-loss model
The saga continues in the Financial
Accounting Standards Board’s push to alter
impairment accounting for most financial
instruments, including loans, investment
securities and other receivables. Since
the recent financial crisis of 2008-09, the
accounting standard-setter in the United
States has worked jointly with its international
counterpart, the International Accounting
Standards Board, to develop an agreeable
financial reporting model that moves loss
recognition forward in the credit cycle.
This push to change impairment accounting
arises from critics who believe that low levels
of loan-loss reserves in banks were a major
contributor to distress in the financial markets
as banks could not act fast enough to contain
wave after wave of losses. The two boards
worked extensively on this issue but could
not agree on a unified response and have
since gone their separate ways. After much
deliberation and consideration, FASB has
proposed the current expected credit-loss
model.
The proposed credit-loss model represents
a radical shift in impairment accounting.
This approach would put forth a single lossestimate methodology for receivables and
would do away with the multiple impairment
frameworks in place today that impair loans
and securities in divergent ways and are
anything but consistent or easily adopted.
Under this new model, impairment would
be calculated as the net present value of
cash flows not expected to be received
over the life of the financial instrument as of
the measurement date. A bank’s estimate
for cash flows not expected to be received
would be based on historical losses, current
economic conditions and future expectations
based on reasonable and supportable
forecasts. Forecasts would require at least
two possible outcomes with a prohibition on
an expectation based solely on the most likely
outcome.
Ill-fitting requirements
In what should be regarded as a shocking
development in the life of this project, FASB
would require the expected-loss calculation
to be recorded when a loan is first recognized
in the financial statements, creating a
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CBI Banker Update | JANUARY 2014

frontloading effect. This means that when a
bank originates or otherwise acquires a loan
or security, a provision for credit losses would
immediately be taken through earnings and
then adjusted over time as the economic and
other factors that impact the loan change.
ICBA is quite concerned with the proposal’s
impact on community banks as it now stands.
While most community bank