Technical Corrections Issued for Financial Instruments

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In March, FASB released a set of technical corrections covering accounting guidance for various financial instruments. The changes in Accounting Standards Update (ASU) 2020-03 provide clarifications and improvements to simplify or reduce operational concerns in implementing recently issued standards. ASU 2020-03 addresses seven financial instrument items from the broader package of 55 issues exposed in November 2019. The remaining issues will be redeliberated and, if approved, be released as a separate set of corrections. The changes have various effective dates based on the underlying standard affected.  

  • Fair Value Option (FVO) Disclosures Clarified. ASU 2020-03 clarifies which FVO disclosure requirements are applicable to nonpublic business entities. As currently written, the requirement includes 825-10-50-20 to 825-10-50-23. The corrected reference is 825-10-50-32. 

Effective immediately for public business entities (PBE). For all other entities, the change is effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020.

  • Portfolio Exception in Accounting Standards Codification (ASC) 820, Fair Value Measurement, Is Expanded to Nonfinancial Items. As currently written, the portfolio exception only applies to financial assets and liabilities. These amendments expand the scope to include nonfinancial items accounted for as derivatives under ASC 815, Derivatives and Hedging.

Effective immediately for PBEs. For all other entities, the change is effective for fiscal years and interim periods beginning after December 15, 2020.

  • Clarifies Disclosures for Depository and Lending Institutions. The disclosure guidance for debt securities in ASC 942, Financial Services—Depository and Lending, did not completely align with the guidance in ASC 320, Investments—Debt and Equity Securities. ASU 2020-03 adds the following sentences, “Securities not due at a single maturity date, such as mortgage-backed securities, may be disclosed separately rather than allocated over several maturity groupings. If allocated, the basis for allocation also shall be disclosed.”   

Effective for fiscal periods beginning after December 15, 2019, including interim periods. 

  • Adds Cross Reference ASC 470-50, Debt—Modifications and Extinguishments. ASU 2020-03 adds a cross reference to clarify the treatment of third-party costs directly related to exchanges or modifications of debt instruments for line of credit or revolving debt arrangements. 

Effective immediately for PBEs. For all other entities, the change is effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. 

  • Net Asset Value (NAV) Practical Expedient in ASC 820-10, Fair Value Measurement—Overall. Changes explain which disclosures do not apply if an entity is using the NAV practical expedient.  

Effective immediately for PBEs. For all other entities, the change is effective for fiscal years beginning after December 15, 2019. 

  • Interaction of ASC 842, Leases, and ASC 326, Financial Instruments—Credit Losses. As currently written, the lease term and the contractual term could be different under ASC 842 and ASC 326, respectively. ASC 326 requires an entity to estimate expected credit losses over the contractual term of a financial asset, including specifying certain requirements that shorten or extend the contractual term if certain conditions are met. Under ASC 842, when a lessor has an option to extend (or not terminate) the lease, the time period beyond those option exercise dates would be considered in determining the lease term. When a lessee has the option to extend (or not terminate) a lease, that additional period would be considered only if it was reasonably certain that the lessee will exercise the option to extend (or not terminate the lease).

    This update aligns the contractual term to measure expected credit losses for a net investment in a lease under ASC 326 to be consistent with the lease term determined under ASC 842.
    • Lease Term
      • The noncancelable period for which a lessee has the right to use an underlying asset, together with all the following:
        • Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option
        • Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option
        • Periods covered by an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the lessor

For entities that have adopted ASU 2016-13, this change is effective for fiscal years beginning after December 15, 2019. For entities that have not adopted ASU 2016-13, these changes are effective at the same time as the adoption of ASU 2016-13.

  • Interaction of ASC 326 and ASC 860-20, Transfers and Servicing—Sales of Financial Assets. As currently written, ASC 860 precludes an entity from recognizing a loan loss allowance for loans that do not meet the definition of a security when they are rerecognized. ASU 2020-03 clarifies that when an entity regains control of financial assets previously sold, an allowance for credit losses should be recorded in accordance with ASC 326.  

For entities that have adopted ASU 2016-13, this change is effective for fiscal years beginning after December 15, 2019. For entities that haven’t adopted ASU 2016-13, these changes are effective at the same time as the adoption of ASU 2016-13.

BKD continues to monitor the FASB standard-setting process. For additional information, contact your BKD Trusted Advisor™ or visit our website.

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