Canada: Will IASB And FASB Impairment Models Be Converged?

The IASB And FASB Impairment Models For Financial Assets Could Differ If The FASB's Plans To Find An Alternative To The "Three Bucket" Approach Are Successful.

The IASB And FASB Have Been Deliberating A Three Bucket Impairment Model For Financial Assets. The FASB Met Recently To Discuss The Next Steps For The Project, After Announcing Its Intention To Further Discuss Key Aspects Of The Model. It Considered The Results Of Outreach Efforts And Constituent Feedback, And Unanimously Agreed With Concerns From US Constituents That Aspects Of The Three Bucket Impairment Model Are Complex And Difficult To Understand. The FASB Will Not, Therefore, Move Forward With An Exposure Draft On The Three Bucket Impairment Model; It Will Instead Explore A Revised Approach.

What Are The Key Issues?

Under The Three Bucket Impairment Model, Financial Assets Would Initially Be Placed In Bucket 1, Where Impairment Losses Would Only Be Recognized For Those Assets Expected To Experience A Loss Event In The Next 12 Months.

As Credit Risk Deteriorates, Assets Would Then Move To Bucket 2 Or Bucket 3, Where Impairment Losses Would Be Measured Based On Lifetime Expected Losses, Irrespective Of When The Loss Event Is Expected To Occur. Key Aspects Of The Three Bucket Impairment Model Include Determining Whether A Loss Event Is Expected To Occur In The Next 12 Months, And The Level Of Credit Deterioration That Requires A Transfer Of Assets Between Buckets. Feedback From US Constituents Indicated Defining These Concepts May Be Difficult And Raised Concerns Over The Understandability, Operability And Auditability Of The Model. The FASB Considered Whether Implementation Guidance Could Adequately Clarify The Objectives Of The Model. It Concluded That, Even With Improved Definitions For The Key Terms, There Was Still Likely To Be Concern Over Whether The Model Results In Impairment Losses That Faithfully Represent The Credit Risk Of The Portfolio. The FASB, Therefore, Directed Its Staff To Explore A Model That Incorporates The Concept Of Expected Losses, But Applies That Concept To All Financial Assets Held And Uses A Single Measurement Approach.

The FASB's Decision To Explore A Revised Approach Could Result In An Impairment Model That Differs From The IASB's Model. During That Discussion, Certain IASB Members Indicated That They Have Heard Much Less Concern About The Three Bucket Impairment Model; It, Therefore, Plans To Move Forward With That Approach.

What Is Next?

The FASB Directed Its Staff To Develop The New Model And Is Hopeful That The Staff Will Be Able To Leverage The Discussions Held To Date In That Process. Discussions Of The New Model Are Expected To Take Place Over The Next Several Weeks, With The FASB's Sharing Its Findings With The IASB In September.

The IASB Has Not Publicly Discussed This FASB Decision And Whether It Will Affect Its Timetable, Which Is To Issue An IASB Exposure Draft In Q4 2012.

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