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FASB Issues New Guidance on Accounting for Credit Losses

June 22, 2016, 07:15 AM
Filed Under: Regulatory News

The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that improves financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations.

“The new standard addresses concerns from a wide range of our stakeholders—including financial statement preparers and users—that the existing incurred loss approach provides insufficient information about an organization’s expected credit losses,” stated FASB Chair Russell G. Golden.

“The new guidance aligns the accounting with the economics of lending by requiring banks and other lending institutions to immediately record the full amount of credit losses that are expected in their loan portfolios, providing investors with better information about those losses on a more timely basis,” Mr. Golden added.

The ASU requires an organization 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 use forward-looking information to better inform 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 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.

The FASB first embarked on a project to improve the financial reporting of credit losses on financial instruments in 2008. Since that time, the FASB has issued three documents for public comment that generated 3,360 comment letters.

Throughout the project, the FASB conducted extensive outreach with diverse groups of stakeholders. That outreach included meetings with over 200 users of financial statements; over 85 meetings and workshops with preparers; over 10 roundtables with more than 100 representatives including users, preparers, regulators, and auditors; and 25 fieldwork meetings with preparers from industries including banking institutions of various sizes, nonfinancial organizations, and insurance companies.

The ASU on credit losses will take effect for U.S. Securities and Exchange Commission (SEC) filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For public companies that are not SEC filers, the ASU on credit losses will take effect for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other organizations, the ASU on credit losses will take effect 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.

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