The Financial Accounting Standards Board has issued an ambitious new plan that will dramatically increase the volume and quality of the disclosures creditors will be asked to provide with respect “financing receivables.” The plan takes the form of a rule exposure draft, and according to the proposal creditors will have to disclose their allowance for credit losses associated with the financing receivables. These rules are scheduled to become effective with respect to interim and annual periods ending after December 15, 2009.
The proposed rule is entitled Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. It applies to all financing receivables held by creditors, both public and private, that prepare financial statements in accordance with generally accepted accounting principles.
For the purpose of the draft statement, financing receivables include “loans” defined as a contractual right to receive money either on demand or on fixed or determinable dates, and that are recognized as an asset regardless of whether the receivable was originated by the creditor or acquired by the creditor. The term loan, however, excludes accounts receivable with contractual maturities of one year or less that arise from the sale of goods or services. Further, there is an exception for credit card receivables, as well, and the draft rule also excludes debt securities as defined in FAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.
The proposal contains several other key terms worth noting. For example, a portfolio segment is the level at which a creditor develops and documents a systematic methodology to determine its allowance for credit losses. For disclosure purposes, portfolio segments are disaggregated in the following way: (1) financing receivables within a portfolio segment that are evaluated collectively for impairment, and (2) financing receivables within a portfolio segment that are evaluated individually for such impairment.
Another term defined in the drat rule is, class of financing receivable, described as a level of information that enables users of financial statements to understand the nature and extent of exposure to credit risk arising from financing receivables. Finally, a credit quality indicator is a statistic about the credit quality of a portfolio of financing receivables.
“Undoubtedly, investors and other users of financial statements will applaud this dramatic expansion of the disclosure standards … the effective date, however, strikes us as somewhat “aggressive” and may be delayed for some period.” — Robert Willens
Types of Disclosures
The proposal also suggests a variety of disclosures that affected creditors will be called upon to provide. For instance, a creditor is required to disclose four key pieces of information related to the financing receivable: (1) a description, by portfolio segment, of the accounting policies and methodology used to estimate the allowance for credit losses; (2) a description, once again by portfolio segment, of management’s policy for charging off uncollectible financing receivables; (3) the activity in the total allowance for credit losses by portfolio segment; and (4) the activity in the financing receivables related to the allowance for credit losses by portfolio segment.