FASB proposed an Accounting Standards Update to address issues raised by stakeholders during the implementation of Accounting Standards Update No. 2016-13, which is titled "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The key issues addressed in this proposal relate to the treatment of negative allowances, transition relief for troubled debt restructurings, and disclosures for accrued interest receivables. Stakeholders are encouraged to review and provide input on the proposal by July 29, 2019.
A negative allowance describes a situation in which an organization recognizes a full or partial write-off of the amortized cost basis of a financial asset—but then later determines that the amount written off, or a portion of that amount, will be recovered. While applying the credit losses standard, stakeholders questioned whether negative allowances were permitted on assets that had already shown credit deterioration at the time of purchase (also known as PCD assets). In response to this question, the proposed Accounting Standards Update would permit organizations to record negative allowances on PCD assets. In addition to other narrow technical improvements, the proposed Accounting Standards Update would also reinforce the existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities.
Other key amendments in the proposed Accounting Standards Update include the following:
- Transition Relief for Troubled Debt Restructurings—The proposed amendments would provide transition relief by permitting entities to adjust the effective interest rate on existing troubled debt restructurings, 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—The proposed amendments would extend the disclosure relief for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis.
Comment Due Date: July 29, 2019
Keywords: Americas, US, Accounting, Banking, Credit Loss Standard, Topic 326, Accounting Standards Update, IFRS 9, FASB
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
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