FASB proposed a standard Wednesday that is designed to ease the transition to its new credit losses standard by providing an option to measure certain types of assets at fair value.
Issued in 2016, FASB’s credit losses standard was created in response to a demand following the global financial crisis for more timely reporting of credit losses on loans and financial assets. A new current expected credit loss model for measuring credit losses on financial assets measured at amortized cost was introduced in Accounting Standards Update No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
The new measurement model replaced the previous method of measuring incurred losses. The standard also changed the accounting for available-for-sale debt securities, which are required to be individually assessed for credit losses when fair value is less than the amortized cost basis.
Some financial statement preparers have begun to elect the fair value option on newly originated or purchased financial assets that historically have been measured at amortized cost. They have discovered that electing the fair value option would require them to maintain dual measurement methods, using both fair value and amortized cost basis.
Under the proposal, preparers would be permitted to irrevocably elect the fair value option, on an instrument-by-instrument basis, for eligible financial assets measured at amortized cost basis upon adoption of the credit losses standard.
This would increase the comparability of financial statement information provided by institutions that otherwise would have reported similar financial instruments using different measurement methodologies. This could decrease costs for preparers while providing more useful information to investors.
Comments on the proposal can be made through March 8 at FASB’s website.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.