United States

FASB provides 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) method for measuring credit losses on financial assets measured at amortized cost, 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 newly originated or purchased financial assets. Those entities historically have measured similar financial assets at amortized cost. 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 ASU 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief, which gives entities the ability to irrevocably elect the fair value option in Subtopic 825-10 for certain existing financial assets upon transition to ASU 2016-13.  Financial assets that are eligible for this fair value election are those that qualify under Subtopic 825-10 and are within the scope of Subtopic 326-20, “Financial Instruments – Credit Losses – Measured at Amortized Cost.” An exception to this is held-to-maturity debt securities, which do not qualify for this transition election.

For entities that have not yet adopted the credit losses standard, the new ASU will be effective when they implement the credit losses standard. For entities that already have adopted the credit losses standard, the new ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in any interim period after the issuance of the new ASU as long as an institution has adopted the credit losses standard.