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Special report

Financial Instruments — Credit Losses


Financial instruments are prevalent across all industries and entities. Examples of financial instruments are loans, receivables (including trade receivables) and securities. These instruments are subject to complicated accounting rules on measuring and presenting expected credit losses.  The rules help ensure that financial instruments are not overvalued in an entity’s financial statements.

The accounting for credit losses under U.S. GAAP is discussed in Topic 326, Financial Instruments—Credit Losses, of the FASB Accounting Standards Codification® (ASC).  Many companies have already adopted Topic 326, while some may still be in the process of implementing the standard.  Overall, preparers and users of financial statements continue to get accustomed to the requirements in Topic 326, such as the estimates, judgments, and disclosures involved.  The accounting for credit losses is also an area of focus for the SEC and other regulators, due to the standard’s relative newness, its complexity, and the COVID-19 pandemic.

This special report explores the accounting for credit losses under Topic 326.  This includes an overview of the accounting, reminders for SEC filers, a comparison of Topic 326 to other impairment models (including the model in International Financial Reporting Standards (IFRS) 9, Financial Instruments, and prior U.S. GAAP), and tips for companies that have not yet adopted Topic 326.

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