On November 19, 2018, the Financial Accounting Standards Board (FASB) released an exposure draft that contained proposed changes to Accounting Standards Update (ASU) 2016-13 Financial Instruments – Credit Losses, commonly known as CECL. The exposure draft also contained narrow scope changes to other standards which are not addressed here.
The proposed changes are a result of the ongoing feedback that the FASB has received from various stakeholders who are working to implement the changes of the new standard. The proposed changes relate to the following provisions within the existing standard:
- Issue 1A: ASU 2016-13 contains specific guidance that accrued interest receivable on a financial instrument is part of the amortized cost basis of the instrument for purposes of determining credit losses. Therefore, accrued interest would be subject to the new guidance as it relates estimating credit losses. Specifically, the new guidance related to losses and recoveries would also be applicable to accrued interest receivable, which would lead to a departure from current practice and may be complicated to implement.
- Issue 1B: ASU 2016-13 did not contain specific guidance with how to treat the allowance for loan losses or valuation account when transferring loans or held to maturity debt securities between classification categories.
- Issue 1C: Certain guidance in ASU 2016-13 could be interpreted to preclude entities from considering recoveries when estimating current expected credit losses. Further, some stakeholders questioned how to account for situations where recoveries were expected to exceed the amortized cost basis of a financial asset.
To address the issues above the FASB has proposed amendments in the exposure draft. For Issue 1A, the FASB has proposed allowing a policy election for accounting for accrued interest receivable. The election would allow for entities to continue to account for accrued interest separately and record charge-offs and recoveries through interest income as is currently done in practice. For Issue 1B, the FASB has provided updated guidance to require an allowance to be reversed when an asset is transferred to another classification where different measurement guidance is applicable. Finally, for Issue 1C, the FASB clarified the guidance to indicate that recoveries should be considered when estimating expected credit losses in amounts not to exceed the amortized cost basis of the asset.
To read the exposure draft, click here.