No I am not going to do a book review on financial instruments. This is an interesting concept being considered as part of the financial instrument project. As many of you already know, the FASB is attempting to develop a single impairment model for financial instruments. In January, the Boards issued a supplementary document that focused only on when and how credit impairment should be recognized. The model being discussed would move from the current incurred loss impairment model to an expected loss model and would require a firm to consider all available information, including forward looking information, when determining the allowance. In calculating the allowance, the firm would classify the financial assets into two types, those managed in the “good book” and those managed in the “bad book”, depending on the degree of uncertainty about the collectability of the cash flows. For example, if the credit risk management objective is to receive regular payments then the financial asset would be classified in the good book. While if the objective is recovery of some or all of the original principal the asset would be classified in the bad book. The calculation of the allowance differs across the two classifications. For assets classified in the bad book, the allowance would be equal to all expected losses. For assets classified in the good book, the allowance amount would be the higher of (1) the time proportional amount of losses for remaining life of the asset and (2) expected losses in the foreseeable future (not less than 12 months). There are lots of issues still remaining to be resolved including addressing how assets would move from one book to another and applying the time proportional approach to certain assets types.