The Financial Accounting Standards Board and the International Accounting Standards Board appear to be mending some differences over how to account for financial instruments, reaching some agreement on the controversial question of how to recognize impairments, or deterioration in value.

The boards seem to have hit some common ground on how to establish an impairment objective and measurement approach that would be used for financial assets, including loans and securities. It has stood for several months as a difference the boards were having trouble reconciling in their quest for a converged accounting solution for financial instruments. FASB Chairman Leslie Seidman has said investors consider it to be one of the most important differences in U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards for the boards to try to resolve.

The two boards have tentatively agreed on a “three-bucket” approach that would lead to earlier recognition of impairment when assets are headed for trouble than under current rules. The first “bucket,” or category of assets, would be used to capture losses on financial assets that are anticipated in the next 12 months – not just the cash shortfalls expected in that period, but the lifetime expected losses where an assets is expected to falter in that 12-month period. The second and third buckets would capture assets where there has been a “more than insignificant deterioration in credit quality,” with one bucket meant for assets that are evaluated as a group and the other reserved for individual assets.

In their ongoing discussions, the boards also tentatively determined the recognition of lifetime expected losses would be based on the likelihood of not collecting all the cash flows, and their model will include indicators for when such recognition might be appropriate. The boards have directed their staff to study whether those same principles might work in reverse to recognize improvements in credit quality. Currently, once an instrument is impaired and written down, there is no provision for writing it back up if it recovers, leading some accounting expert to wonder if that makes it more difficult for holders of such assets to take impairments that might otherwise be warranted.