The Financial Accounting Standards Board has issued a proposed accounting standards update to address a number of clarity or implementation issues associated with three major standards on financial instruments.
The proposal would edit standards on recognizing and measuring financial instruments, credit losses, and derivatives, all of which FASB issued separately to take effect at staggered times over the course of a few years. The board has monitored implementation of the standards and considered the need for corrections or clarifications to help companies best observe the requirements. The proposed changes are not expected to have a significant effect on accounting practice or to create a significant administrative cost, FASB said in its proposal.
With respect to credit losses, where companies are required to follow a current expected credit losses model for determining how to report trouble in debt portfolios, FASB is taking cues from its Transition Resources Group. The TRG recommended a number of issues for FASB to consider revising in the original standard, including guidance on accrued interest, transfers between classifications, recoveries, vintage disclosures, and contractual extensions and renewals. The proposed update also suggests some revisions to guidance on reinsurance recoveries, interest rates, prepayments, and others.
Calendar-year public companies are preparing to adopt the CECL standard by Jan. 1, 2020, with many of them finalizing their models so they can run dual systems for comparative and testing purposes in 2019. Some financial institutions, concerned by the initial output of their newly developed CECL models, have called on FASB to delay the effective date and reconsider the standard. A smaller group of banks have asked FASB to reconsider the effect of the CECL approach on the income statement.
Regarding hedging, FASB is proposing some changes to its standard issued under ASU 2017-12 as well as other guidance on hedging. The proposed amendments would improve guidance on partial-term fair-value hedges of interest rate risk, amortization of fair-value hedge basis adjustments, and certain disclosures and transition issues, among others. The hedging standard is set to take effect on Jan. 1, 2019, for calendar-year companies, although some companies elected early adoption.
FASB’s proposed update also makes some changes to the guidance on a new standard that took effect in 2018 on measuring and recognizing financial instruments in financial statements. The amendments would clarify the scope of the standard with respect to health and welfare plans, disclosures regarding held-to-maturity debt securities, and the remeasurement of equity securities at historical exchange rates.
FASB is accepting comments on the proposed amendments through Dec. 19.