The FASB on March 9, 2020, said it amended seven areas of financial instruments accounting rules, narrow items it worked to quickly fix because they include matters relevant to credit loss provisions large public companies adopted this year.
The board published Accounting Standards Update (ASU) No. 2020-03, Codification Improvements to Financial Instruments, to eliminate accounting inconsistencies and to make the codification easier to apply.
Companies that have already adopted, or are in the process of adopting credit loss rules this year, should especially take note of two items in the update: 1) an alignment of the interaction of Topic 842, Leases, and Topic 326, Credit Losses, for determining the contractual term of a net investment in a lease when measuring expected credit losses; and, 2) the clarification of the interaction of Topic 326 and subtopic 860-20, Transfers and Servicing–Sales and Financial Assets, to provide reporting consistency.
Specifically, the change clarifies that the contractual term of a net investment in a lease, determined in accordance with the leases standard, should be the contractual term used to measure expected credit losses under Topic 326.
It also amends subtopic 860-20 to state that when a company regains control of financial assets sold, an allowance for credit losses should be recorded in accordance with Topic 326.
For large public companies that have already adopted ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, that took effect January 1, the rules are immediately effective. Those companies, however, have specific transition requirements for both of the credit loss items clarified under ASU No. 2020-03. The changes have to be applied on “a modified-retrospective basis by means of a cumulative effect adjustment to opening retained earnings in the statement of financial position as of the date that it adopted the rules,” a text of the new rules states. Smaller reporting companies as defined by the SEC, private companies, and all other entities can adopt the changes when they adopt ASU No. 2016-13 in 2023. Early adoption is permitted.
Clarifies certain disclosure rules
Other noteworthy areas ASU No. 2020-03 clarifies are the applicability of disclosures for the fair value option to private companies and disclosures for depository and lending institutions.
Accountants were confused about whether private companies or other entities that are not considered “public business entities” would need to provide the fair value option disclosures in paragraphs 825-10-50-24 through 825-10-50-32. The amendments confirm that they do.
Moreover, the FASB said its stakeholders noted that the disclosure guidance for debt securities under Topic 942, Financial Services—Depository and Lending, did not completely align with the guidance in Topic 320, Investments— Debt and Equity Securities. They pointed particularly to the guidance in paragraphs 942-320-50-3 and 320-10-50-3.
The amendments clarify that the disclosure requirements in Topic 320 apply to the disclosure requirements in Topic 942 for depository and lending institutions.
The disclosure changes take effect immediately for public companies.
For an in-depth analysis of the FASB’s standard for the classification and measurement of financial instruments, please see Catalyst: US GAAP – Financial Instruments — Classification and Measurement.
For in-depth analysis of the FASB’s guidance for credit losses, please see Catalyst: US GAAP—Financial Instruments-Impairment, also on Checkpoint.
Additional analysis of the credit loss standard can be found at Accounting and Auditing Update Service [AAUS] No. 2016-29 and SEC Accounting and Reporting Update Service [SARU] No. 2016-34 (July 2016): Special Report: Accounting for Credit Losses on Certain Financial Assets—An Explanation and Analysis of Accounting Standards Update No. 2016-13.
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