FASB Issues Targeted Transition Relief for Financial Instruments Credit Losses Standard

The FASB has issued Accounting Standards Update (ASU) No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. This new ASU is designed to ease the transition to the financial instruments credit losses standard by allowing the option to measure certain types of financial assets at fair value.

Background

The financial instruments credit losses standard, ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses, introduces the current expected credit losses (CECL) model. The CECL model for measuring credit losses on financial assets measured at amortized cost replaces the previous incurred loss method. ASU No. 2016-13 also modifies the accounting for available-for-sale debt securities, as well as requiring available-for-sale debt securities to be individually assessed for credit losses when fair value is less than amortized cost basis.

Some stakeholders note that certain financial statement preparers have elected the fair value option on newly originated or purchased financial assets that have historically been measured at amortized cost. They note that electing the fair value option requires the maintenance of dual measurement methods, fair value measurements and amortized cost basis.

Amendments

The amendments in ASU No. 2019-05 provide an option to irrevocably elect the fair value option, on an instrument-by-instrument basis, for eligible financial assets measured at amortized cost basis upon adoption of the credit losses standard. This increases the comparability of financial statements of institutions that otherwise would report similar financial instruments using differing measurement methodologies. The new option should decrease costs for financial statement preparers and provides more useful information to financial statement users.

Effective Date

For institutions that have not yet adopted the credit losses standard, the new ASU is effective when they implement the credit losses standard.

For institutions that have already adopted the credit losses standard, the new ASU 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 its issuance as long as an institution has adopted the credit losses standard.

 

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