Academic journal article Academy of Accounting and Financial Studies Journal

Financial Instrument Credit Impairment Models-A Rift in the Convergence of IASB and FASB Accounting Standards

Academic journal article Academy of Accounting and Financial Studies Journal

Financial Instrument Credit Impairment Models-A Rift in the Convergence of IASB and FASB Accounting Standards

Article excerpt


Differences in accounting standards across countries and capital markets pose a barrier to the international free flow of capital due to the lack of comparability of financial statements. Because of this issue, in 2006 the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) agreed on a series of short-term and long-term cooperative projects that would (1) improve International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP) and (2) bring IFRS and GAAP closer to convergence (IASB-FASB, February 27, 2006). This agreement was an extension of an earlier 2002 memorandum of understanding between the IASB and FASB that formalized their commitment to convergence of international and U.S. accounting standards.

On April 5, 2012, the IASB and FASB issued a joint report on the convergence of accounting standards, which stated that the boards were close to completing their agreed-upon projects. This joint report also revealed that the IASB and FASB were working to quickly reach converged solutions for the remaining projects and that "the boards are continuing their efforts to achieve a single set of high quality, global accounting standards ..." (IASB-FASB, April 5, 2012). Consequently, it seemed that convergence of accounting standards was proceeding smoothly.

The remaining IASB-FASB convergence projects involve financial instruments, leases, revenue recognition, and insurance projects. An issue to be addressed within the financial instruments project is that of financial instrument credit impairment which is of significant importance to the global financial markets. At the urging of the G20 leaders, the FASB and the IASB have been working on developing an expected credit loss impairment model, which is a forward-looking approach to account for credit losses. The result of their work is a jointly developed model, described as a "three-bucket" (three categories) expected loss approach that reflects the deterioration in the credit quality of financial assets (FASB, June 15, 2011).

Both the IASB and the FASB issued documents on the topic of impairment of financial instruments that detailed the three-bucket model and invited comments from stakeholders. In their April 5, 2012 joint report, the IASB and FASB state that "Stakeholders responded that reaching a common impairment solution is very important." The IASB and FASB also realize the importance of convergence on this issue and affirm that "Reaching a converged solution is of the utmost importance." Consequently, "The IASB and the FASB ... continue to jointly develop a common impairment model" (IASB-FASB, April 5, 2012, p. 8).

After the issuance of the April 5, 2012 joint report, the FASB continued to conduct stakeholder outreach activities regarding the three-bucket impairment model. The purposes of these outreach activities were twofold: to gather stakeholder feedback regarding whether (1) the three-bucket model would be operable, auditable and understandable, and (2) the draft guidance for the three-bucket model provided by the FASB was sufficiently clear. In their July 2012 feedback summary report of the three-bucket impairment model, the FASB concluded that, based on stakeholder feedback, further clarification of the principles of the model was necessary. The report also noted that stakeholder feedback, in general, indicated concern regarding the operability of the model and concern that comparability may be reduced if the model was implemented as currently proposed.

In August 2012, four months after the IASB-FASB joint report on convergence, the FASB unilaterally proposed the "Current Expected Credit Loss Model" (CECL Model) due to concerns expressed by stakeholders in the July 2012 feedback summary of the original model proposed jointly by the two boards. The FASB model is expected to be formally proposed in an exposure draft by the end of 2012. …

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