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Business and Policy Areas
Business and Policy Areas

FASB Issues Supplementary Document on Impairment of Financial Assets

February 23, 2011

The Financial Accounting Standards Board (FASB) in conjunction with the International Accounting Standards Board (IASB) is seeking input on its proposed changes to the impairment model for financial assets. The supplementary document, “Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities: Impairment” (the supplement) proposes a common approach to recognizing credit losses on financial assets managed as an open portfolio, such as student loans. It does not apply to financial assets that are individually managed or that are managed as a closed portfolio.

Currently, credit losses are accounted for using an incurred loss model, which requires a triggering event to occur before financial assets can be written down. The FASB believes that the current approach results in allowances for credit losses that are not adequate to cover losses when they occur.

The proposal contained in the supplement is an expected loss model that provides a more forward-looking approach to how credit losses are accounted for. Under the proposed model, the open portfolio would be classified into two groups referred to as the “good book” and the “bad book” with the distinction being made based on the degree of uncertainty around collectability. At each reporting date, an entity would adjust the impairment allowance as follows:

  1. For financial assets in the good book, expected losses would be recognized over the weighted-average life of the portfolio at an amount equal to the higher of: 1) the time-proportional expected credit losses; or 2) the credit losses expected to occur within the foreseeable future (but not less than 12 months).
  2. The bad book portion of the portfolio would have the entire amount of expected losses recognized immediately.

The biggest impact of the proposed guidance on colleges and universities is likely to be the way that allowances are calculated and accounted for on student loan portfolios. The good book model, as proposed, would essentially create a floor for the allowance which could be significantly higher than that which is currently recognized and may not accurately reflect the credit risk of the portfolio.

The supplement can be downloaded from FASB’s website. Comments should be submitted by April 1, 2011 to the FASB. NACUBO encourages independent institutions to submit comments directly to the FASB or send comments to NACUBO for inclusion in our industry comment letter.


Sue Menditto
Director, Accounting Policy