FASB Proposes New Model for Credit Losses

February 22, 2013

The Financial Accounting Standards Board (FASB) has issued a proposed Accounting Standards Update (ASU) — "Financial Instruments — Credit Losses (Topic 825-15)." The ASU would replace the current "incurred loss" impairment model of accounting for credit losses on financial assets with one that reflects the current estimate of cash flows expected to be collected at the reporting date. The proposed model, referred to as the "current expected credit loss" (CECL) model, would require an entity to estimate an allowance for expected credit losses based on relevant information about past events (including historical loss information on similar assets), current conditions, and reasonable and supportable forecasts that are expected to affect the collectibility of future cash flows. The ASU also proposes disclosures that include both quantitative and qualitative information about the credit quality of the financial assets.

The ASU appears to be aimed at the financial services industry, which has been accused of overstating assets by delaying recognition of credit losses on loans until a loss had occurred. Despite its obvious intention, the ASU would apply to all entities including not-for-profits (NFPs). This is problematic in that NFPs, by their very nature, do not consider credit risk when providing credit. They exist for the benefit of society and, as such, provide their products and services to those who will benefit from them. Credit is extended based on need, not credit-worthiness. Of particular concern for independent colleges and universities are promises to give (which are not clearly scoped out in the ASU) and student loan receivables - especially those that are subject to forgiveness if the student meets certain criteria.

The ASU can be downloaded from the FASB's website. NACUBO's Accounting Principles Council (APC) is studying the ASU to determine the effort involved in adopting the new impairment model and providing the required disclosures, as well as the value of those efforts in providing relevant information to users of an independent institution's financial statements. The APC will provide feedback to FASB on the ASU by the April 30 comment deadline. NACUBO encourages independent institutions to submit comments directly to FASB or send comments to NACUBO for inclusion in our industry comment letter.