United States

Recent CECL developments

FINANCIAL REPORTING INSIGHTS  | 

Recently, there have been important developments related to implementation of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

On October 30, 2018, the AICPA Financial Reporting Executive Committee issued a working draft discussing implementation Issue #6: Reasonable and Supportable Forecast–Developing the Period and Use of Historical Information. This working draft discusses the following matters related to certain judgments an entity may need to make in estimating current expected credit losses (CECL): (a) considerations that may be useful to entities in determining their reasonable and supportable forecast period for forecasts of future conditions that affect expected credit losses; and (b) how an entity would determine the historical loss information it will revert to once it is beyond a period in which it can make or obtain such forecasts. The working draft is available for comment until December 31, 2018, and upon finalization, Issue #6 will be included in a new AICPA Allowance for Credit Losses Audit and Accounting Guide.

On November 7, 2018, the FASB discussed implementation issues addressed at the November 1, 2018 Credit Losses Transition Resource Group meeting. Most notably, the FASB tentatively decided that the vintage credit quality disclosure requirements that apply to public business entities should be clarified to require an entity to present gross recoveries and gross writeoffs by origination year. Given the operational complexities this decision may cause, it will be issued as a separate proposed ASU, which will have a 60-day comment period and an effective date to be determined.

Other tentative FASB decisions, which are briefly summarized below, are expected to be included in a November 2018 proposed ASU of codification improvements, which will have proposed effective dates to mirror those of ASU 2016-13 and a 30-day comment period:

  • Recoveries – The FASB reaffirmed its decision from an August 2018 meeting that recoveries should be included in the determination of the allowance for credit losses but reversed its previous decision that would have limited recoveries to amounts received from the borrower. The FASB declined to indicate specifically what types of recoveries should be considered but rather stated that entities should continue to leverage current practices and historical data regarding recoveries to use as an input for the CECL calculation.
  • Negative allowances – The FASB decided that an entity should be able to record a negative allowance on financial asset(s) when measuring CECL, so long as the amount of the negative allowance does not exceed the aggregate amount of previous or expected writeoffs of the financial asset(s).
  • Vintage disclosures: revolving loans – The FASB decided that an entity should be required to disclose amounts of line-of credit (LOC) arrangements that are converted to term loans by origination year  when an additional credit decision was made by the entity. If no additional credit decision was made, an entity should disclose those LOC arrangements that are converted to term loans (including troubled debt restructurings) in a separate column.
  • Contractual extensions – The FASB decided that an entity should consider extension or renewal options that are not unconditionally cancellable by the entity that are included in the original or modified contract when determining the contractual term over which to estimate expected credit losses on a financial asset(s).