By Denise Lugo
The FASB on November 26, 2019, issued narrowly drawn amendments to clarify five issues accountants flagged under its credit loss accounting standard, rules that change the way banks report losses from soured loans.
The board issued Accounting Standards Update (ASU) No. 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses , to remove potential implementation hurdles as companies adopt ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments .
The rules take effect January 1, 2020, for large public companies with a calendar year-end reporting cycle.
“After issuing the current expected credit losses standard—also known as CECL—in 2016, the FASB received questions about certain confusing areas of the guidance,” FASB Chairman Russell Golden said in a statement. “The new ASU clarifies these areas of the guidance to ensure all companies and organizations can make a smoother transition to the standard.”
The amendments provide better guidance on how to report expected recoveries, meaning what a company expects to recover from soured financial assets after it had initially written off a portion or the full amount of the asset.
Financial statement preparers had asked the board whether expected recoveries were permitted on assets that had already shown credit deterioration at the time of purchase (PCD assets). The rules clarify that companies are permitted to record expected recoveries on PCD assets.
“FASB clarified that recoveries should be part of your lost estimation, Greg Norwood, Deloitte’s CECL implementation leader for financial institutions, said. “So not just how much you lost on the loan when you charged it off but how much did you collect after you’ve liquidated, collateral etc.,” he said.
The amendments do not change the current expected credit loss (CECL) rules at a micro level, but it does take away from implementation hurdles that companies were seeing as they went through the rules, Norwood said.
Another notable change includes the simplification of disclosure rules for items such as accrued interest receivable, the text of the standard states. “That was presenting a challenge relative to just pulling the numbers together for disclosure,” said Norwood. “But from an industry perspective there’s nothing in here people weren’t expecting.”
Five Issues Addressed
Specifically, the text of the amendments describes the changes as follows:
- Expected recoveries for purchased financial assets with credit deterioration: to clarify that the allowance for credit losses for PCD assets should include in the allowance for credit losses expected recoveries of amounts previously written off and expected to be written off by the entity and should not exceed the aggregate of amounts of the amortized cost basis previously written off and expected to be written off by an entity. In addition, it clarifies that when a method other than a discounted cash flow method is used to estimate expected credit losses, expected recoveries should not include any amounts that result in an acceleration of the noncredit discount. An entity may include increases in expected cash flows after acquisition;
- Transition relief for troubled debt restructurings (TDRs): to provide transition relief by permitting entities an accounting policy election to adjust the effective interest rate on existing TDRs using prepayment assumptions on the date of adoption of Topic 326 rather than the prepayment assumptions in effect immediately before the restructuring;
- Disclosures related to accrued interest receivables: extends the disclosure relief for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis;
- Financial assets secured by collateral maintenance provisions: clarifies that an entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing the financial asset to apply the practical expedient. An entity applying the practical expedient should estimate expected credit losses for any difference between the amount of the amortized cost basis that is greater than the fair value of the collateral securing the financial asset (that is, the unsecured portion of the amortized cost basis). An entity may determine that the expectation of nonpayment for the amount of the amortized cost basis equal to the fair value of the collateral securing the financial asset is zero; and,
- Conforming amendment to Subtopic 805-20: The amendment to Subtopic 805-20, Business Combinations— Identifiable Assets and Liabilities, and Any Noncontrolling Interest , clarifies the guidance by removing the cross-reference to Subtopic 310-30 in paragraph 805-20-50-1 and replacing it with a cross reference to the guidance on PCD assets in Subtopic 326-20.
For in-depth analysis of the FASB’s guidance for credit losses, please see Catalyst: US GAAP—Financial Instruments-Impairment, also on Checkpoint.
Additional analysis of the credit loss standard can be found at Accounting and Auditing Update Service [AAUS] No. 2016-29 and SEC Accounting and Reporting Update Service [SARU] No. 2016-34 (July 2016): Special Report: Accounting for Credit Losses on Certain Financial Assets—An Explanation and Analysis of Accounting Standards Update No. 2016-13 .
This article originally appeared in the November 27, 2019 edition of Accounting & Compliance Alert, available on Checkpoint.
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