FASB CECL model vs. IASB credit deterioration model, pros and cons

**The FASB issued the final CECL standard on June 16, 2016. For up-to-date information and resources, access the updated CECL Prep Kit.

The FASB and IASB have released separate exposure drafts, outlining their distinct, proposed plans for the recognition and reporting of credit losses. The release of these drafts marked a divergence from the previously accepted plan. In December 2012, the FASB released an exposure draft describing what is commonly referred to as the CECL model. This model was a more simplified version of the formerly agreed upon three-bucket approach. On the other hand, the IASB continued to develop the three-bucket approach with its draft in March 2013, which is now referred to as the credit deterioration model.

 

Each of the two models has their own unique characteristics, and as a result, there are a number of pros and cons for each.

 

FASB’s CECL model
Pros	Cons
• Forward-looking requirements	• Lack of clarity on how to calculate future expected losses
• Immediate write-offs	• Potential for large, immediate increase in allowance levels
• Improved definitions of interest income, collateral-dependent, etc.	• The IASB feels this approach states originated assets as below fair value

 

IASB’s credit deterioration model
Pros	Cons
• Forward-looking requirements, immediate write-offs	• Lack of clarity on how to calculate future expected losses
• Does not require lifetime losses for pass-rated loans	• Ambiguity surrounding Stage 2 classification
• Includes financial guarantee contracts	• CECL model seems to be clearer in terms of purchased credit-impaired (PCA) financial assets

 

To learn more about the IASB’s credit deterioration model, FASB’s CECL model and the history of their convergence and divergence, download the whitepaper, FASB vs. IASB Proposals: Can’t We “ALLL” Just Get Along?