FASB Proposes Standard for Credit Losses

The Financial Accounting Standards Board has proposed a new standard for disclosures about the credit quality of financing receivables and the allowance for credit losses.

The exposure draft of the proposed statement would require more detailed disclosures of a company’s credit losses and the quality of their receivables. The standard defines two levels of disaggregation: portfolio segment and class of financing receivable. A portfolio segment is a higher level of aggregation and generally will have more than one class of financing receivables. A portfolio segment is defined as the level at which a creditor develops and documents a systematic methodology for determining its allowance for credit losses.

A class of financing receivable is defined as a level of information that enables users of financial statements to evaluate the nature and extent of the exposure to credit risk arising from financing receivables that a creditor holds at the date of the financial statements. The proposed standard provides additional implementation guidance to determine the appropriate level of disaggregation of information.

Under FASB’s proposed statement, there are six major categories of disclosures: allowance for credit losses, roll-forward schedules of financing receivables, fair value, credit quality information, impaired financing receivables, and non-accrual status. The disclosures for allowance for credit losses, roll-forward schedules of the allowance for credit losses and for financing receivables, and fair value are disaggregated by portfolio segment. The disclosures for credit quality information, impaired financing receivables, and non-accrual status are further disaggregated by class.

FASB is asking for comments on the proposed standard, particularly about whether constituents believe that it would achieve the goal of providing more information regarding the nature of credit risk inherent in the creditor’s portfolio of financing receivables; how that risk is analyzed and assessed in arriving at the allowance for credit losses; and the changes, and reasons for the changes, in both the receivables and the allowance for credit losses.

Responses must be received in writing by Aug. 24, 2009. Interested parties should submit their comments by e-mail to director@fasb.org, File Reference No. 1700-100.