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IASB and FASB issues Credit Impairment Guideline Principles

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have combined their individual proposals and compiled a new credit impairment approach to attain convergence. This came after a supplementary document was released a t the end of the financial crisis and was developed as a proposed solution to the credit crunch.

They have invented a "Three-Bucket" model to explore the mechanisms in which they suggest will classify loans in accordance with their various levels of credit quality. This simply means that loans will be calculated separately based on past, present and future substantial information.

Under this new model, IASB and FASB proposed that the loans would be split into "Three-Buckets":

• 1^st Bucket: This bucket is of the premise that credit losses are a result of the effects of the Macro-economic stance that the world is currently experiencing – Circumstances beyond the debtors' control.
• 2^nd Bucket: Bucket number two explores the concept of credit loss due to an observed series of events that will instigate the inability to recover money owed to you, somewhat a predictable outcome.
• 3^rd Bucket: Finally, this bucket examines credit losses that are expected to default as a result of the foreseen events discussed in bucket two.

The board aims to release the final draft of this new credit impairment approach in September 2011.

The FASB Chair added that if the event driven approach were incorporated into the credit risk model it was important that the terminology be more clear as use of the term 'events' suggests the model is no longer focused on 'expected' credit losses but rather incurred credit losses. She suggested use of the term 'cues' instead of 'events'.

The Board tentatively decided to proceed with development of a credit risk model using the 'relative' approach but including event indicators as cues for assets transferring between buckets.