FASB Issues Staff Q&A Document on Estimating Credit Loss
Reserves
Norwalk, CT, January 10, 2019—The Financial
Accounting Standards Board (FASB) staff today issued a question-and-answer
document that addresses particular issues related to the weighted average
remaining maturity (WARM) method for estimating the allowance for credit losses
as required in Accounting
Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments.
The credit losses standard issued in
2016 requires organizations to measure all expected credit losses for financial
assets 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
method; however, it allows organizations to use judgment in determining the
relevant information and estimation methods that are appropriate in their
circumstances.
Some stakeholders, including small financial
institutions, asked the staff whether it would be acceptable to use the 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 for the
remaining balances (that is, losses occurring through the end of the contractual
term) of financial assets in a pool at the balance sheet date.
In
the question-and-answer document, the FASB staff 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 staff also provides
examples of how it could be used.
The staff question-and-answer
document is available at www.fasb.org.