Background
The Financial Accounting Standards Board (FASB) has been working since 2009 on a project regarding the accounting for financial instruments. While dubbed "financial instruments" projects, these projects are really about bank accounting and represent the biggest overhaul of accounting principles ever.
In summary, there are three main issues:
- Classification and measurement: What assets and liabilities should be measured at amortized cost (with an allowance for losses) and what should be measured at fair value?
- Impairment: For those assets measured at amortized cost, how should the allowance for losses be measured?
- Hedge accounting: for derivatives that are used in hedges, what requirements and accounting entries should there be?
Within each of these phases, footnote disclosure, as well as financial statement presentation issues, is addressed.
May 2013 Update
On Accounting Resources:
FASB and IASB have recently issued proposals on impairment for loans and debt securities and on classification and measurement of financial assets. In summary, the impact on banks will be significant.
Impairment:
Impairment for both IASB and FASB proposals, life-of-loan “expected loss” models are required. In other words, based on long-term data, an allowance must be recorded at origination that represents average losses in your portfolio.
- Huge operational changes will be required to analyze life of loan performance.
- For longer term products, significantly higher allowances may be required.
- The same process is required for debt securities.
- For the IASB model, there may be lower allowances required for your best loans. However, the operational challenges of the model appear insurmountable for most banks, as it requires “probability of default” (both over the next year and over the life of the asset) data to be maintained and also requires significant tracking of unimpaired loans that have evidence of “signification deterioration.”
In response, ABA has proposed for FASB and IASB to adopt the “Banking Industry Model” (BIM), which is an enhancement of current models which are based on annualized charge-off data and “loss emergence” periods.
Click here for a copy of the ABA’s comment letter to FASB.
Click here for a copy of the ABA’s comment letter to FASB and IASB on moving toward the BIM.
Click here for a copy of a template to use to file your own comment letter to FASB.
Click here for Frequently Asked Questions related to the FASB proposal.
Classification and Measurement:
In response to FASB’s 2010 proposal that required all loans to be marked to market, FASB has proposed that only loans that do not have basic loan features be marked to market. Further, the “FAS 115” style of classification for securities is being applied to loans, too. Unfortunately, specific definitions in the proposal, as well as other classification restrictions, appear to have the potential of greatly expanding the loans and securities that must be marked to market, with changes in market price recorded through net income. With this in mind, ABA believes FASB is not intending to expand mark to market accounting. However, ABA has submitted a
comment letter to either keep the current accounting or make significant changes to the definitions in the proposal.
Click here for Frequently Asked Questions related to the FASB proposal.
Click here for a copy of a template to use to file your own comment letter to FASB.
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