Question

In December 2012, the FASB issued a proposed Accounting Standai·ds Update (i.e., an Exposure Draft), Financial Instruments-Credit Losses (Subtopic 825-15) and solicited constituent feedback. Locate this proposed standard.

1. Read the summary section of this proposed standard. What change in accounting does this exposure draft propose?

2. Look for comment letters related to this exposure draft. From fasb.org, navigate to Projects, then Comment Letters. Under "Accounting for Financial Instrnments," locate this topic, then click on the link to view comment letters. Next:

a. Locate a comment letter that looks interesting to you. What company or individual wrote the letter, and what is their perspective in writing this letter (i.e., are they writing from the perspective of a financial statement user, preparer, etc.)?

b. What aspects of the proposed standard does the commenter support?

c. What concerns does the commenter raise regai·ding the proposed standard?

. How would you expect a company (preparer) might react to this proposed standard compared to how a banker (investor) might react? Explain.

Answer 1

Proposed Accounting Standai·ds Update

1. Change in accounting does the exposure draft propose?In December 2012, the FASB issued a proposed Accounting Standai·ds Update (i.e., an Exposure Draft), Financial Instruments-Credit Losses (Subtopic 825-15) and solicited constituent feedbackThe Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) began a joint project to revise and improve their respective standards of accounting for financial instruments.The inherent complexity of having multiple credit impairment models was identified as an additional weakness of existing accounting standards.The main objective in developing this proposal is to provide financial statement users with more decision-useful information about the expected credit losses on financial assets and other commitments to extend credit held by a reporting entity at each reporting date.These proposed amendments also would reduce complexity by replacing the numerous existing impairment models in current U.S. GAAP with a consistent measurement approach.The Generally Accepted Accounting Principles (GAAP) for recognizing credit losses and broaden the range of information..As a result of the proposed amendments, financial assets carried at amortized cost less an allowance would reflect the current estimate of the cash flows expected to be collected at the reporting date,and the income statement would reflect credit deterioration (or improvement) that has taken place during the period. For financial assets measured at fair value with changes in fair value recognized through other comprehensive income,the balance sheet would reflect the fair value,but the income statement would reflect credit deterioration (or improvement) that has taken place during the period. An entity, however, may choose to not recognize expected credit losses on financial assets measured at fair value, with changes in fair value recognized through other comprehensive income, if both (1) the fair value of the financial asset is greater than (or equal to) the amortized cost basis and (2) expected credit losses on the financial asset are insignificant.

The proposed amendments in the 2012 proposed Update would broaden rather than limit the information set that an entity is required to consider in developing its credit loss estimate. Specifically, the proposed amendments would require that an entity’s estimate be based on relevant information about past events,including historical loss experience with similar assets,current conditions, and reasonable and supportable forecasts that affect the expected collectibility of the financial assets’remaining contractual cash flows.The proposed amendments have a single measurement objective,one in which expected credit losses should reflect management’s estimate of the contractual cash flows not expected to be collected from a recognized financial asset (or group of financial assets).The proposed amendments would maintain the approach in current U.S. GAAP that measures interest income and credit losses separately.Under, proposed amendments in the 2012 an entity would apply the proposed amendments by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective.

Both Boards,IASB and FASB have been working to address perceived weaknesses in the current guidance relating to the delayed recognition of credit losses and the complexity of multiple impairment models,so-called three-bucket impairment model.The proposed amendments, the three-bucket model would eliminate the probable initial recognition threshold and broaden the information set that an entity is required to consider in developing its credit loss estimate.These are the changes in accounting with the effect of proposed Accounting standai-ds Update issues of FASB ,December 2012.