United States

Two working drafts: Allowance for credit losses implementation issues


The AICPA Financial Reporting Executive Committee (FinREC) is requesting comment prior to October 10, 2018 on two working drafts discussing implementation issues related to Financial Accounting Standards Board Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments:  

  • Issue #1: Zero Expected Credit LossesUnder the current expected credit loss (CECL) model in ASU 2016-13, no measure of expected credit losses is required for a financial asset or group of financial assets if historical credit loss information, adjusted for current conditions and reasonable and supportable forecasts, results in an expectation of nonpayment of the amortized cost basis of zero. FinREC believes that the analysis of whether no measure of expected credit loss is required focuses on an asset’s loss given default because the ASU contemplates the probability that an asset could default, but the lender would not experience any loss in such an event.

    There are instruments explicitly or implicitly guaranteed by the U.S. government, such as U.S. Treasury securities, for which an entity may conclude that the expectation of nonpayment is zero. Entities are responsible for documenting the continuous evaluation and monitoring of the instruments within their portfolios and the associated factors that may change and impact the expectation of non-payment. Issue #1 includes examples illustrating the evaluation of whether the expectation of nonpayment is zero. Upon finalization, Issue #1 will be included in a new AICPA Allowance for Credit Losses Audit and Accounting Guide.

  • Issue #22: Reversion Method: Estimation vs. Accounting PolicyPer ASU 2016-13, for periods beyond which an entity is able to make or obtain reasonable and supportable forecasts of expected credit losses, an entity should revert to historical loss information, either at the input level or based on the entire estimate. An entity may revert to historical loss information immediately, on a straight-line basis or using another rational and systematic basis. Questions have been raised as to whether the reversion technique used is an accounting estimation technique or an accounting policy election. FinREC believes the reversion technique used in estimating expected credit losses is an accounting estimation technique. Upon finalization, Issue #22 will be included in the AICPA Depository and Lending Institutions: Banks and Savings Institutions, Credit Unions, Finance Companies, and Mortgage Companies Audit and Accounting Guide.