FASB Staff Q&A document: Estimating credit loss reserves
FINANCIAL REPORTING INSIGHTS |
In June 2016 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires organizations to measure all expected credit losses for financial assets within its scope and held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts with the objective of presenting an entity’s estimate of the net amount expected to be collected on the financial assets. The standard does not require a specific credit loss estimation method.
Stakeholders have asked the FASB staff whether it would be acceptable to use the weighted average remaining maturity (WARM) method to estimate expected credit losses. The WARM method uses an average annual charge-off rate as a foundation for estimating the credit losses through the end of the contractual term for the remaining balances of financial assets in a pool at the balance sheet date. Recently, the FASB staff issued a question-and-answer (Q&A) document in which it agrees that the WARM method is one of many methods that could be used to estimate an allowance for credit losses for less complex financial asset pools. The Q&A addresses particular issues related to the WARM method and provides examples of how it could be used.