FASB issued an Accounting Standards Update 2019-05 (on Topic 326) that eases transition to the credit losses standard by providing the option to measure certain types of assets at fair value. The amendments in the Accounting Standards Update provide targeted transition relief that is optional for, and will be available to, all reporting entities within the scope of Topic 326. The consultation on the proposed Accounting Standards Update took place from February to March 2019.

The new Accounting Standards Update allows an option for preparers to irrevocably elect the fair value option, on an instrument-by-instrument basis, for eligible financial assets measured at amortized cost basis, on adoption of the credit losses standard. This increases the comparability of financial statement information provided by institutions that otherwise would have reported similar financial instruments using different measurement methodologies, potentially decreasing costs for financial statement preparers while providing more useful information to investors and other users.

For institutions that have not yet adopted the credit losses standard, the new Accounting Standards Update will be effective when they implement the credit losses standard. For institutions that have already adopted the credit losses standard, the new Accounting Standards Update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in any interim period after the issuance of the new Accounting Standards Update as long as an institution has adopted the credit losses standard. The amendments in this new Accounting Standards Update require improvements to the U.S. GAAP Financial Reporting Taxonomy (taxonomy), which will be incorporated into the proposed 2020 taxonomy. 

The credit losses standard, which was issued in 2016, had introduced the expected credit losses method for measuring credit losses on financial assets measured at amortized cost. It also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis. Some stakeholders—including auto financing institutions that extend credit to borrowers with limited or impaired credit histories—noted that certain financial statement preparers have begun (or are planning) to elect the fair value option on newly originated or purchased financial assets that have historically been measured at amortized cost. They noted that electing the fair value option would require them to maintain dual measurement methods—fair value measurements and amortized cost basis. FASB has issued this Accounting Standard Update to address the issue arising from these developments.

 

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Keywords: Americas, US, Accounting, Banking, Topic 326, Accounting Standards Update, Credit Losses Standard, IFRS 9, Financial Instruments, CECL, FASB

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