United States

Narrow-scope amendments to financial instruments standards


The Financial Accounting Standards Board recently issued Accounting Standards Update (ASU) 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, to make clarifying amendments to certain financial instrument standards, which are summarized in part below. Reference should be made to ASU 2019-04 for a complete understanding of its provisions and the related effective dates.

Related to ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the amendments allow an entity to:

  • Measure the allowance for credit losses on accrued interest receivable balances separately from other components of the amortized cost basis of associated financial assets
  • Make accounting policy elections to:
    • Not measure an allowance for credit losses on accrued interest receivable amounts if the entity writes off the uncollectible accrued interest receivable balance in a timely manner and makes certain disclosures
    • Write off accrued interest amounts by reversing interest income or recognizing credit loss expense, or a combination of both
    • Present accrued interest receivable balances and the related allowance for credit losses for those accrued interest receivable balances separately from the associated financial assets on the balance sheet
    • Adjust the effective interest rate used to discount expected future cash flows for expected prepayments on financial assets within the scope of Subtopic 326-20 and on available-for-sale debt securities within the scope of Subtopic 326-30 to appropriately isolate credit risk in determining the allowance for credit losses
  • Elect a practical expedient to disclose separately the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements

Additionally, among other provisions, the amendments related to ASU 2016-13 also clarify that:

  • With respect to the allocation of equity method losses when an investor has other investments, such as loans and debt securities, in the equity method investee, entities should refer to Topic 326 for the subsequent measurement of those loans and debt securities
  • Recoveries should be included when estimating the allowance for credit losses
  • Expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account and should not exceed the aggregate of amounts previously written off and expected to be written off
  • An allowance for credit losses that is added to the amortized cost basis of collateral-dependent financial assets should not exceed amounts previously written off
  • All reinsurance recoverables within the scope of Topic 944, “Financial Services—Insurance,” are within the scope of Subtopic 326-20
  • There is flexibility in determining the allowance for credit losses by removing the prohibition of using projections of future interest rate environments when using a discounted cash flow method to measure expected credit losses on variable-rate financial instruments
  • The estimated costs to sell should be considered when foreclosure on a financial asset is probable and the entity intends to sell rather than operate the collateral
  • Line-of-credit arrangements that convert to term loans should be presented in a separate column in the vintage disclosures
  • Extension and renewal options that are not unconditionally cancellable by the entity should be considered when determining the contractual term of a financial asset

The amendments related to ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, clarify certain matters, including those related to:  

  • Partial-term fair value hedges of interest rate risk
  • Amortization and disclosure of fair value hedge basis adjustments
  • Consideration of the hedged contractually specified interest rate under the hypothetical derivative method
  • Its application to not-for-profit entities
  • Reclassification of a debt security from held-to-maturity to available-for-sale and other transition matters

Among other provisions, the amendments related to ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, clarify that:

  • Entities that are not public business entities are exempt from fair value disclosure requirements for financial instruments that are not measured at fair value on the balance sheet, including held-to-maturity debt securities
  • The remeasurement of an equity security without a readily determinable fair value when an orderly transaction is identified for an identical or similar investment of the same issuer is a nonrecurring fair value measurement, subject to the relevant disclosure requirements of Topic 820, “Fair Value Measurement”