FASB issues narrow-scope improvements to credit losses standard. An Accounting Standards Update (ASU) made these improvements that addresses issues raised by stakeholders. These issues were raised during the implementation of ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
“After issuing the current expected credit losses standard—also known as CECL—in 2016, the FASB received questions about certain confusing areas of the guidance,” explained FASB Chairman Russell G. Golden. “The new ASU clarifies these areas of the guidance to ensure all companies and organizations can make a smoother transition to the standard.”
Among other narrow-scope improvements, the new ASU clarifies guidance around reporting expected recoveries. “Expected recoveries” describes a situation in which an organization recognizes a full or partial write-off of the amortized cost basis of a financial asset. However, it 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 ASU permits organizations to record expected recoveries on PCD assets.
The ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. The ASU includes effective dates and transition requirements that vary depending on whether an entity has already adopted ASU 2016-13.
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