The Financial Accounting Standards Board (FASB) recently released an accounting standard updating the guidance on recognition and measurement of credit losses for financial assets. Accounting Standards Update 2016-13—Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,supersedes today’s guidance and applies to all entities that hold financial assets not measured at fair value through net income. FASB has replaced today’s “incurred loss model” with an “expected credit loss model.” At acquisition and each reporting date, entities will recognize an allowance for lifetime expected credit losses for instruments. The amount recognized will be based on the current estimate of contractual cash flows not expected to be collected.
Purchased credit-impaired assets (former PCI) will follow the same model, simplifying the accounting treatment. In addition, the other than temporary impairment model has been eliminated and replaced with an allowance approach, which would permit entities to recognize reversals of credit losses. The new standard’s extensive new disclosures are also covered in this white paper.