United States

FASB proposes targeted transition relief for CECL

FINANCIAL REPORTING INSIGHTS  | 

In June 2016 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced the current expected credit loss (CECL) model for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. ASU 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed, and expected credit losses recognized, when fair value is less than the amortized cost basis.

When analyzing the adoption of ASU 2016-13, some entities have decided to instead elect the fair value option in Subtopic 825-10, “Financial Instruments – Overall,” for some or all of their loan portfolios, which with limited exceptions, only is available for newly originated or purchased financial assets. These entities historically have measured their loan portfolios at amortized cost basis. The entities noted that, because of the limitations for when the fair value option can be elected, they would be required to maintain dual measurement methodologies (i.e., fair value for new assets and amortized cost for existing portfolios) that would result in noncomparable financial statement information for users.

To address these concerns, the FASB recently issued a proposed ASU, Targeted Transition Relief for Topic 326, Financial Instruments – Credit Losses, which, if finalized, would ease transition to the credit losses standard by providing the option to measure certain existing assets at fair value. Specifically, the proposed ASU would provide entities that have loans and other receivables within the scope of Subtopic 326-20, “Financial Instruments – Credit Losses – Measured at Amortized Cost,” with an option to irrevocably elect to account for assets within the scope of the fair value option guidance in Subtopic 825-10, “Financial Instruments – Overall,” at fair value through earnings. This election can be made on an instrument-by-instrument basis upon adoption of Topic 326, but cannot be made for debt securities, which the FASB decided to exclude from the scope of this transition relief.

The proposed ASU is available for comment until March 8, 2019.