In addition to finalizing and setting a 2019 effective date for a new standard on leasing accounting, the Financial Accounting Standards Board has determined public companies will be required to apply new rules on classification and measurement of financial instruments beginning in 2018 and impairment of financial instruments in 2019.
FASB has wrapped up its long-running work on changes to the way companies will classify and measure financial instruments and has directed its staff to prepare the final language of the Accounting Standards Update for a board vote. The standard will take effect for public and private companies for fiscal years beginning after Dec. 15, 2017, including interim periods within those annual periods. Not-for-profits and employee benefit plans within scope will be expected to apply the new approach for fiscal years beginning after Dec. 15, 2018, and interim periods after Dec. 15, 2019.
As for impairment, FASB made some decisions around troubled debt restructurings by creditors and the credit loss model for available-for-sale securities, and it set effective dates and rules for early application. The new impairment requirements will take effect for filers with the Securities and Exchange Commission for fiscal years beginning after Dec. 15, 2018, as well as interim periods within those fiscal periods. Other entities will have at least one extra year to apply the new approach.
With respect to TDRs, FASB determined that credit losses associated with TDRs should be measured using the board’s “current expected credit loss” model that will apply to all other financial assets measured at amortized cost. The board decided against requiring a discounted cash flow approach to measure TDR credit losses as required in current rules. The board also decided against a cost-basis adjustment for TDRs. Entities will be allowed to recognize the credit losses, including any concession given to the borrower, through an allowance account.
As for available-for-sale securities, FASB’s new rule will say that a fair value floor should be incorporated into the credit loss model. As such the credit losses on such securities will be limited to the difference between the security’s amortized cost basis and its fair value, the board says. FASB also determined it will retain guidance in existing GAAP that requires companies to consider whether it is more likely than not that the entity will have to sell the security before its amortized cost basis recovers. The requirement to consider historical or implied volatility when considering whether a credit loss exists will be removed, but that won’t prohibit an entity from the consideration.
FASB expects to publish the final rules on classification and measurement by the end of 2015 and impairment in the first quarter of 2016. The board is still working on an exposure draft for new rules on hedge accounting. That proposal is expected in the first quarter of 2016 as well.
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