Guidance for Bad Debt Reserves to Remain in U.S. GAAP
FASB has agreed to drop a proposal that would have erased some guidance for deferred tax credits and liabilities on reserves for bad debt. Large banks no longer use the guidance, but it still applies to small banks and thrifts. The bad debt reserve method allows businesses to add a reasonable amount to a reserve in lieu of accounting for specific items of bad debt. Deferred taxes that were recognized on bad debt reserves beginning after December 31, 1987, had to be paid over a six-year period beginning in 1996. Certain thrifts that retained a substantial amount of mortgage lending could defer the payment for two years, FASB said. “This is a very clear example of why the exposure draft process is so important and why participation in this process is so incredibly important,” noted FASB member Christine Botosan.
Not-for-Profit Asset Impairment Guidance Requires More Research
FASB has decided to do more research before it clarifies its guidance for not-for-profit organizations to write down the value of investments. The board believes not-for-profit organizations will be helped if they have uniform subsequent measurement guidance for investments not covered by the credit losses standard, but board members are not sure they need to take action. “If you’re talking about a Codification improvement, it’s really designed to take the existing Cod[ification] and make it easier to navigate,” said FASB Chairman Russell Golden. “We also need to reduce the number of different accounting models applicable to very similar economic events, which sounds like a simplification project.” Golden said the staff needed to do more research before the board would make the change the staff recommended.
Comment Letters Support Proposed Update of Materiality Definition
Most of the audit firms, professional groups, national standards setters, and businesses responding to an IASB proposal to revise the definition of “materiality” in IFRS have backed the purpose of the proposed change. The proposal states: “Information is material if omitting, misstating, or obscuring it could reasonably be expected to influence decisions that the primary users of a specific reporting entity’s general purpose financial statements make on the basis of those financial statements.” IASB believes the proposed change will help businesses and other organizations know what is important to include in their financial statements and what is acceptable to omit, but several comment letters expressed concerns about the specific wording and asked the accounting board to clarify its proposed changes before finalizing them. “The notion that material information might be obscured by immaterial information is not clear and should be clarified,” one firm wrote. “The inclusion in financial statements of immaterial information does not by itself obscure material information or result in a misstatement.”