Proposal Would Amend Credit Loss Accounting Rules to Simplify Reporting of Purchased Financial Assets
FASB has issued a proposal to obtain public comment on changes to provide a single accounting model for all acquired financial assets under the credit losses standard. The proposal responds to concerns raised by businesses that the existing rules are complex and do not result in useful information for investors. Companies have until August 28 to submit comments on the guidance, which was issued under Proposed Accounting Standards Update (ASU) 2023-ED400, “Financial Instruments—Credit Losses (Topic 326) Purchased Financial Assets.” The proposal will amend the current expected credit losses (CECL) standard, which currently requires two different models for acquired financial assets depending on a borrower’s creditworthiness. Specifically, the CECL standard has two models for assets such as loans purchased in a business combination or asset acquisition: purchased credit deteriorated (PCD); and non-PCD. The board proposed to expand the PCD model to include high-quality loans, resulting in all loans being accounted for the same way under a new term “purchased financial assets” (PFA), according to the text of the proposal. The non-PCD model—deemed to be unintuitive and causing banks to double count losses—would be eliminated. The changes would provide investors with better information as the distinction between PCD and non-PCD assets is not well understood, the board said in the “basis for conclusions” section of the proposal. The changes would also help financial statement preparers as they would no longer “be required to qualitatively assess the change in credit quality of acquired financial assets since origination.”
International ESG Rulemaker Publishes New Climate and Sustainability Disclosure Rules
The International Sustainability Standards Board (ISSB) has issued two new disclosure standards that aim to interweave the climate and sustainability footprint of businesses into financial reporting. The standards are the first round of environmental, social and governance (ESG)-related disclosure rules to be developed by the board for global use. Both standards are effective for annual reporting periods beginning on or after January 1, 2024. Earlier application is permitted if both are applied at the same time. “Our language is an accounting language; it is sustainability translated into an accounting language,” ISSB Chair Emmanuel Faber said in a speech at an IFRS Foundation conference that same day. “You will find in S1, in particular the general requirements, a huge amount of notions that you’re very familiar with on purpose because we want as much as possible that connection within the general purpose financial reporting with the financial statements and with the valuation,” he said. “We are here to support the needs of the primary users of general-purpose financial reports in the amount and the decision that they take on providing resources to entities, companies, bankers investors and others. That’s the reason why we exist and for that we know which language they need to be using and we’re focusing on that.” Under IFRS S1, General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2, Climate-Related Disclosures, businesses must disclose all sustainability-related risks and opportunities that could reasonably be expected to affect their cash flows, as well as access to finance or cost of capital over the short, medium, or long term that could reasonably be expected to affect prospects. S2 addresses climate-related risks to which the entity is exposed, i.e., climate-related physical risks; climate-related transition risks; and climate-related opportunities available to the entity. The ISSB’s trustees have stressed that the rules are to be viewed as a global baseline for use worldwide.
Significant IASB Standard on Primary Financial Statements to be Issued Next Year
The IASB’s current effort to revise the primary financial statements will “birth” a new accounting standard next year that will affect all companies that report using IFRS standards, chair Andreas Barckow said at the IFRS Foundation Conference on June 26, 2023. The board is aiming to issue the revised standard in the first half of 2024 with a new number: International Financial Reporting Standard (IFRS) 18. “We have yet to make a decision [about the effective date]—whether we say it’s two years, whether it’s three years [from publication],” Barckow said in response to a question posed by a conference attendee. “But if you say published publication in 2024, two years onwards, that means it would become effective for years starting in 2027, but that is just to show you the timeline as to how this would work out,” he explained. “And we could always obviously allow for early adoption, so if somebody is really eager to provide the standard early on they could have the potential to do so.” In earlier remarks, Barckow said that the board will discuss the effective date of the standard during meetings in July. The rules have been in the works for years by the IASB to revamp financial performance reporting—a major topic. The changes will require companies to report operating profit—a measure that enables investors to know how profitable a company is when you strip away its investing and financing activities.