The Financial Accounting Standards Board is starting to soften its stand on how companies should account for expected credit losses as it pick through a long list of objections to its proposed accounting standards update for financial instruments.

FASB met with the International Accounting Standards Board to work through various questions regarding whether and how companies should account for expected impairments, or loan losses. The boards have tentatively decided that a company should determine its expected credit losses based on all available information, including historical data, current economic conditions, and forecasts of future economic conditions that are backed by good evidence.

The boards also decided that a company’s estimate of expected credit losses should be based on lifetime expected losses of the financial assets. They also decided that a company should not simply assume that future conditions will remain unchanged from current conditions. The two boards did not make any decisions about how companies would recognize expected losses. That question will be debated at a future joint meeting.

Existing U.S. accounting rules and FASB’s highly controversial proposal for a new standard make little allowance for companies to estimate future credit losses and reflect such estimates. Current rules do not allow companies to reflect a loss until it actually occurs. Banks in particular have argued if they know a loss is imminent, investors might like a little advance notice.

“In today’s world, a credit impairment is recognized when something happens,” said David Larsen, managing director at Duff & Phelps who is following the debate around financial instruments closely. “FASB’s proposal took it a little further than that, but it didn’t take into account anticipatory events.”

Larsen said if a company, such as a bank, manages its business by considering its business cycle and planning accordingly, it would seem logical for the accounting to reflect it. FASB’s latest decisions with the IASB suggest is coming around to that line of thinking, he said. It also suggests FASB and IASB are getting closer to a more converged approach on the question of how to reflect expected losses.

“The piece they haven’t yet taken into account is when do you recognize the impairment and how do you record it,” he said. FASB also has yet to speak on how it will address the most contentious aspect of its proposal - that companies should use more fair value in accounting for their financial assets, even long-term instruments that they plan to hold to maturity.

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