Staff at the Financial Accounting Standards Board plans to recommend some narrow changes to the new standard on credit losses to answer implementation questions.
The Financial Accounting Standards Board’s Transition Resource Group for Credit Losses will meet Monday, June 11, to pore over the latest questions companies have raised as they prepare to implement new accounting rules. FASB staff members have researched issues around capitalized interest, accrued interest, transfers between classifications, recoveries, and refinancing and loan repayment, and they plan to recommend some limited edits to the original standard.
Effective Jan. 1, 2020, companies are required to reflect credit losses in financial statements in compliance with Accounting Standards Update No. 2016-13, which is codified in the Accounting Standards Codification under Topic 326. ASC 326 requires companies to take a more forward-looking approach to accounting for debt-related financial instruments, using a “current expected credit losses” model to give investors a better warning when a portfolio is showing signs of trouble.
Anticipating questions as companies dig into the standard and determine how they will comply with it, FASB formed the Transition Resource Group to field those queries and provide answers. In some cases, the TRG refers questions to the full FASB for its consideration, especially if the inquiry process suggests the standard could benefit from some revision.
With respect to capitalized interest, the TRG will discuss how capitalized interest should be considered when estimating CECL using a method other than a discounted cash flow method. FASB staff said it has heard varying interpretations of what the standard requires. The staff plans to recommend to the TRG that it would not be appropriate to compare accrued interest to a discount in complying with the CECL model.
Questions on accrued interest have focused on the inclusion of accrued interest in the definition of amortized cost basis and the reversal of recognized but uncollected interest on non-performing financial assets, FASB staff says. After analyzing the views of those with different interpretations of the original standard, the staff said the board may want to consider a technical amendment to the standard to clarify it did not intend to broadly change non-accrual policies.
In terms of classification, FASB staff have fielded two primary questions. The first surrounds how to apply the CECL guidance when transferring loans from held-for-sale to loans that are held for long-term investments. The two different classifications are subject to different recognition approaches, so the transition from one category to the next is significant. The second question, similar in significance, focuses on how to apply the model when transferring troubled debt securities from available-for-sale to held-to-maturity.
To address both questions, the FASB staff recommends an approach that would necessitate another technical change to the Codification. The TRG will determine whether to pass that recommendation along to the full FASB. With respect to recoveries, FASB staff will tell the TRG they believe the board’s original intent was clear, but the board might want to consider a clarification to the language to make its intent more explicit.