FASB issues narrow-scope changes to credit losses standard

By Jeff Drew

FASB issued narrow-scope improvements Tuesday to its new accounting standard for credit losses.

The new Accounting Standards Update (ASU), Codification Improvements to Topic 326, Financial Instruments — Credit Losses, addresses concerns voiced by accountants and other stakeholders regarding implementation of the new credit losses standard, ASU No. 2016-13Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

"After issuing the current expected credit losses standard — also known as CECL — in 2016, the FASB received questions about certain confusing areas of the guidance," FASB Chairman Russell G. Golden said in a news release. "The new ASU clarifies these areas of the guidance to ensure all companies and organizations can make a smoother transition to the standard."

FASB first issued the new CECL standard in 2016 with the goal of establishing a more forward-looking approach to financial reporting on credit losses.

The new ASU makes a number of narrow-scope improvements. Among them:

  • The new ASU clarifies guidance around how to report expected recoveries. Expected recoveries is the term applied to a scenario in which an organization recognizes a full or partial write-off of the amortized cost basis of a financial asset but then later determines that all or a portion of the amount written off will actually be recovered. While applying the credit losses standard, stakeholders questioned whether expected recoveries were permitted on assets that had already shown credit deterioration at the time of purchase (these are also known as PCD assets). In response to this question, the ASU permits organizations to record expected recoveries on PCD assets.
  • The ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities.

The new credit losses standard goes into effect for fiscal years (and interim periods within those years) beginning after Dec. 15, 2019, for all public business entities that file with the SEC. The effective date for public business entities that are not SEC filers is fiscal years beginning after Dec. 15, 2020.

For all other organizations, the new standard takes effect for fiscal years beginning after Dec. 15, 2020, and for interim periods within fiscal years beginning after Dec. 15, 2021.

All organizations are permitted to adopt the new standard early.

Jeff Drew (Jeff.Drew@aicpa-cima.com) is a JofA senior editor.

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