To make it easier for companies to adopt a new standard on credit losses, the Financial Accounting Standards Board is considering a change that would permit more use of fair value.
The current expected credit losses model, or CECL, required under Accounting Standards Codification Topic 326 takes effect Jan. 1, 2020. FASB’s Transition Resource Group is fielding implementation questions and concerns related to ASC 326 adoption to help companies interpret and prepare for the new standard.
In addition to replacing an incurred loss approach to measuring and reporting credit losses with a more forward-looking approach under CECL, the new standard also modifies the accounting approach for available-for-sale debt securities. ASC 326 requires entities to assess each such security for credit losses when the fair value is less than the amortized cost basis, FASB says.
Now some entities preparing for the new accounting, including auto financing companies that extend credit to borrowers with limited or poor credit histories, have asked FASB to reconsider how they must transition to the new CECL accounting when they elect an option to measure new or acquired financial assets at fair value that historically have been measured at amortized cost. The rules suggest such entities would have to maintain dual measurement methods, fair value, and amortized cost, which would lead to problems with comparability for users of financial statements, FASB says.
As such, the board is proposing to modify ASC 326 to permit entities to elect the fair value option, irrevocably, instrument by instrument, for financial assets that are eligible. “This would increase the comparability of financial statement information provided by institutions that otherwise would have reported similar financial instruments using different measurement methodologies,” FASB says. The change to the rules is expected to reduce cost and burden on preparers while providing more useful information to investors and other users of financial statements, the board says.
FASB is accepting comments on the proposal through March 8. Separately, the board is still considering how it will respond to a request by a number of banking entities to reconsider how CECL effects should be reported in income. FASB Chairman Russ Golden indicated the board would meet in March to determine its next steps on that request following a January roundtable.