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FASB Discusses Impairment of Financial Assets Project

During the Financial Accounting Standards Board’s (“FASB”) December 21st meeting, the board continued redeliberations on its proposed Accounting Standards Update, Financial Instruments—Credit Losses (Subtopic 825-15). In particular, the FASB discussed the following issues:

  • Accounting for Purchased Financial Assets with Credit Deterioration (PCD Assets). The FASB determined that when the credit losses allowance is estimated without a method that discounts future anticipated cash flows, the allowance should be based on the average of the PCD asset. When the credit losses allowance is estimated with a method that discounts future anticipated cash flows, entities should use the discount rate that associates the PCD asset’s purchase price with the current value of projected future cash flows.Also discussed was requiring the discounted cash flow method to be used for measuring PCD assets’ projected credit losses at their date of acquisition. The FASB, however, decided not to require a specific estimation method to be used either initially or on ensuing measurement dates.
  • Treatment of Premiums and Discounts When Measuring Credit Loss. The FASB determined that a credit losses allowance measured through a method that does not discount future anticipated cash flows should indicate expected credit losses of the financial assets’ amortized cost basis. However, to limit disruption to the current processes used for measuring credit losses, an entity can separately calculate anticipated credit losses on the unpaid principal balance (face amount), and premiums or discounts and foreign exchange and fair value hedge accounting changes.

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