On June 16, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses, which is listed as Topic 326 within the Accounting Standards Codification (ASC) (the Standard). This highly anticipated guidance has been under development since 2010, incorporating feedback from over 3,000 comment letters on two exposure drafts from 2010 and 2012. The Standard affects entities holding financial assets and net investment leases not accounted for at fair value through net income.
Current accounting requires that credit losses are recognized when it is probable that a loss has been incurred. This delayed recognition of credit losses that were expected by an entity, but that had not yet met the probability threshold. ASC 326 replaces the incurred loss methodology with a framework that requires recognition of financial assets as the amount expected to be collected through the measurement of currently expected credit losses.
Among the provisions of ASC 326 are new accounting models that require consideration of expected credit losses for the following instruments:
Assets Measured at Amortized Cost and Certain Off-Balance Sheet Credit Exposures (CECL Model)
Available-for-Sale (AFS) Debt Securities
Purchased Financial Assets with Credit Deterioration (PCD)
Beneficial Interests in Securitized Financial Assets Proportionate procedures