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The Financial Accounting Standards Board’s (FASB) final version of its “Current Expected Credit Losses” standard under U.S. generally-accepted accounting principles (US GAAP), which FASB plans to issue in the fourth quarter of this year, is likely to require credit unions to increase their loan loss reserves significantly once it is phased in. FASB’s new rules would move US GAAP’s credit loss accounting from the currently applicable “incurred loss” approach to a forward-looking “expected loss” approach where an institution estimates its future losses and recognizes them on an accounting basis even if those losses have not yet occurred.   

Although FASB seems set on finalizing its proposal, there is another expected credit losses standard developed by the International Accounting Standards Board (IASB) called International Financial Reporting Standard 9 which would be less burdensome on credit unions and should also arguably be the expected credit loss standard under US GAAP.

IASB finalized its expected credit loss standard in April 2014 and it will apply to credit unions in Canada, Australia and most other jurisdictions outside of the United States. Whereas FASB’s expected credit loss approach would recognize expected lifetime credit losses on all loans, IASB’s expected credit loss standard is generally considered less stringent because it only recognizes expected losses on performing loans if those losses are likely to occur within the next 12 months. For loans that have experienced significant arrearage (such as being 30 or more days in arrears), IASB’s rules recognize lifetime expected credit losses in a way similar to FASB’s proposed standard, even if the loan later becomes re-performing.

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