The American Institute of CPAs (AICPA) Financial Reporting Executive Committee (FinREC) expressed significant objections to the U.S. Financial Accounting Standards Board’s (FASB’s) financial instruments impairment proposal.
The high-profile project is designed to address some of the causes of the recent financial crisis and calls for measurement and reporting of expected losses rather than incurred losses.
Although the project began as a convergence effort with the International Accounting Standards Board (IASB), FASB took a different path from the IASB in developing a current expected credit loss (CECL) method for impairment.
In a comment letter to FASB, FinREC said the proposed CECL model, as well as the current IASB proposal, require significant work to be operational and result in improved, faithful financial reporting. FinREC is a senior committee of the AICPA for financial reporting and is authorised to make statements on behalf of the AICPA on financial reporting matters.
According to FinREC, FASB’s proposed model:
- Lacks a strong enough conceptual basis for sound financial reporting;
- Departs significantly from the incurred-loss model;
- Creates two incompatible loss contingency models;
- Double counts expected losses; and
- Unjustifiably increases the accounting and financial reporting burden for smaller financial institutions and non-financial services entities.
FinREC encouraged FASB to keep working with the IASB to reach a converged, high-quality model for reporting impairment of financial instruments.
“Having to maintain more than one financial reporting system has significant costs and adds much complexity to entities’ reporting process,” FinREC wrote.
FinREC is particularly at odds with both boards over the issue of expected credit losses, which are the foundation of the FASB and IASB models. Since 2010, FinREC has maintained that incurred losses should remain the basis for recognising credit impairment, and that losses should not be recognised until there is a triggering event.
According to FinREC, it is unlikely that financial institutions’ expectations about the future would have predicted the extent of the losses that occurred during the financial crisis.
“This action compromises the fundamental accounting principle that losses are recorded when incurred, rather than when there is a possibility that they may occur in the future,” FinREC wrote.
—Ken Tysiac (firstname.lastname@example.org) is a CGMA Magazine senior editor.