Additional disclosures on credit quality of financing receivables

With Non-performing assets for banks still rising for some of the US banks, the FASB issued further guidance requiring additional disclosure on credit quality of financing receivables.

“The global financial crisis highlighted the need for additional information about a company’s financial instruments, including loans and other financing receivables,” FASB Chairman Robert Herz said in FASB's press release

The additional disclosures required include:

1. Aging of past due receivables,
2. Credit quality indicators,
3. Nature and extent of troubled debt restructuring
4. Modifications of any troubled debt done in the past 12 months which have resulted in losses again, and
5. significant sale and purchases of receivables

While the intent of the update is primarily to give the readers an assessment of the nature of credit risk in an entity, how this credit risk is managed and what are the reasons for changes in allowance for receivables.

While points 1,4 and 5 are more a matter of subject of fact and can be easily reported, it will be interesting to see as to how will Companies represent credit quality indicators in point 2. There will be a varied choice of benchmarks which each Company will use to map the credit quality indicators.

Short-term accounts receivable, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from the ASU.

For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after Dec. 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after Dec. 15, 2010.

For nonpublic companies, the amendments are effective for periods ending on or after Dec. 15, 2011.