Roundtable discussion reminded me of a post by Cathy Shakespeare on good vs bad book.  Just this week, some groups in my Theory class were assigned to analyze the FASB and IASB “Supplemental Document” that she cites.  One group is to explain the proposal.  The other group is to highlight the comment letters.  I will add a comment to this post if they come up with some neat insight.

As I have now studied the Supplemental Document in some detail, I find it rather extraordinary.  First, the title implies proposed guidance on impaired financial assets, but in reality, its scope is restricted to only financial assets in ”open portfolios.”  Second, as mentioned by Cathy, it breaks assets in open portfolios into a good book and bad book.  The former appear to have a low probability of any specific asset defaulting, so any credit quality problems are handled on a portfolio basis.  Further, in concept for good book assets, any existing credit quality issue when an asset is acquired is amortized over the life of the asset.  However, since the accounting is at the (open) portfolio level where some assets are acquired and some are sold or settled each year, the proposal appears to recognize credit losses for the entire portfolio over the average remaining life for good book assets  For bad book assets, the expected credit losses are expensed in their entirety when they occur.  Third, as mentioned in the earlier blog thread on this issue, the document is long on principles and short on specifics as to how credit losses are assessed, what is consider good versus bad book, etc.  Thus even if the feedback favors the approach in the Supplemental Document, the guidance still is not sufficiently complete to ready for practice.

The extraordinary aspect of this (at least to me) is that I cannot remember the FASB ever issuing an exposure document with a preliminary approach to a little sliver of an active issue (e.g., the open portfolio piece of financial instruments).  At times, the Board has reduced the scope of an active project, in which case subsequent exposure documents may look a lot narrower.  But that is not the case here.  The entire topic of accounting for financial assets and liabilities is still on the table as I understand it.

I wonder if this “divide and conquer” approach to an issue might be the wave of the future when tackling difficult problems – put sub issues out for comment and see if they fly rather than delaying the vetting of early decisions until a complete proposal is finished.  Or maybe the looming 2011 deadline pushed the Boards to handle this piecemeal?  Or maybe this approach is issue specific – open portfolios are very common for financial instruments and the existing proposals aimed at the asset rather than the portfolio level were not going to work.

Actually, maybe I should take back my comment about “piecemeal.”  Prior to this step, the FASB and IASB were working at their own pace and own approaches to financial instruments.   Many of the comment letters on the original financial instrument proposal criticized the Boards for this.  Maybe by floating this trial-balloon compromise on open portfolios, the Boards were sending the signal that they could cooperate.  Also, maybe some Board members hope that the constituent response to the Supplemental Document will go along way in mending strong differences of opinion across Boards.]]>