FASB Issues Guidance on CECL

Carl Chatto, Managing Principal
June 16, 2016

The Financial Accounting Standards Board (FASB) today issued an Accounting Standards Update (ASU) referred to in our Issues of Interest published on Monday. The ASU requires timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations.

The new ASU requires banks and other lending institutions to immediately record the full amount of credit losses that are expected in their loan portfolios and to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now need to use forward-looking information to determine their credit loss estimates.

Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances.

The ASU also requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements.

Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

When Are the Amendments Effective?

For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Thus, for a calendar-year SEC filer, the ASU will be effective January 1, 2020.

For public business entities that are not SEC filers, the new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

For all other organizations, the new guidance is effective for fiscal years beginning after December 15, 2020, and for interim periods within fiscal years beginning after December 15, 2021.

Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

The full text of the ASU can be found here; watch for future detailed analysis from BNN on this important topic.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.