FASB published an Accounting Standards Update (No. 2019-11) that addresses issues raised by stakeholders during the implementation of the Accounting Standards Update No. 2016-13 on the measurement of credit losses on financial instruments (Topic 326). The key areas of improvement include expected recoveries for purchased financial assets with credit deterioration, transition relief for troubled debt restructurings, disclosures related to accrued interest receivables, and the conforming amendment to Subtopic 805-20.
Among other narrow-scope improvements, the new Accounting Standards Update clarifies how to report expected recoveries. Expected recoveries cover 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 in fact be recovered. While applying the credit losses standard, stakeholders questioned whether expected recoveries 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 Accounting Standards Update permits organizations to record expected recoveries on PCD assets.
In addition to other narrow technical improvements, the Update also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. The amendments extend the disclosure relief for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis. Additionally, the amendments provide transition relief by permitting entities an accounting policy election to adjust the effective interest rate on existing and troubled debt restructurings, using the prepayment assumptions on the date of adoption of Topic 326 rather than the prepayment assumptions in effect immediately before the restructuring.
For entities that have not yet adopted the amendments in Update 2016-13 as of the issuance date of this Update, the effective dates and transition requirements for the amendments are the same as the effective dates and transition requirements in Update 2016-13. For entities that have adopted the amendments in Update 2016-13, the amendments in this Update are 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 issuance of this Update as long as an entity has adopted the amendments in Update 2016-13. For entities that have adopted the amendments in Update 2016-13, the amendments in this Update should be applied on a modified retrospective basis by means of a cumulative-effect adjustment to the opening retained earnings balance in the statement of financial position as of the date that an entity adopted the amendments in Update 2016-13.
Keywords: Americas, US, Accounting, Banking, Credit Losses Standard, Topic 326, Accounting Standards Update, IFRS 9, CECL, Expected Recoveries, 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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