FASB Issues Improvements for Credit Losses Standard
FASB Issues Improvements for Credit Losses Standard
Summary
The FASB issued ASU 2019-11[1] (“Update”) to clarify its new credit impairment guidance in ASC 326[2] based on implementation issues raised by stakeholders. The new ASU is available here and the effective dates align with those for Topic 326.[3]
Background
In 2016, the FASB issued ASC 326 requiring application of the current expected credit loss (“CECL”) methodology for the measurement of credit losses on financial assets measured at amortized cost. The CECL methodology replaces the previous incurred loss methodology. It also modifies the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis.
Since issuing the standard, the FASB has identified certain areas that need clarification. The FASB also established the Transition Resource Group (TRG) for Credit Losses early in 2016 to solicit, analyze, and discuss implementation issues that could arise when organizations implement ASU 2016-13.
Main Provisions
The amendment clarifies five issues, four of which are summarized below. Issue 5 has been excluded as it simply corrects cross-references.
What was the issue? |
Summary of Improvements |
---|---|
Issue 1: Expected Recoveries for Purchased Financial Assets with Credit Deterioration (PCD) |
Expected recoveries are to be included in the allowance for credit losses for these financial assets. However, the expected recoveries should not exceed the total amortized cost basis that is expected to be, or already has been, written off. |
Issue 2: Troubled Debt Restructurings Transition |
An entity can make an accounting policy election to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions applicable on the adoption date of ASC 326 instead of the prepayment assumptions applicable immediately prior to the restructuring event. |
Issue 3: Disclosures for accrued interest receivables |
The amendment extends the practical expedient to all additional relevant disclosures involving amortized cost basis. |
Issue 4: Financial assets backed by Collateral Maintenance Provisions |
The amendments clarify that an entity should consider the borrower’s ability to continue to replenish the collateral associated with the financial assets. |
Effective Dates and Transition
For entities that have not adopted ASC 326, the transition requirements and effective dates for this Update are the same as those applicable for ASC 326, as amended by ASU 2019-10.
For entities that have adopted ASC 326, the amendments in this Update are effective in fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted but no earlier than an entity’s adoption date of ASC 326. The amendments should be applied on a modified-retrospective basis through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASC 326.
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