On June 16, 2016, the Financial Accounting Standards Board (FASB) issued its new guidance on accounting for credit losses, referred to as the current expected credit losses (CECL) standard, with ASU 2016-13 Financial Instruments (Topic 326) – Measurement of Credit Losses on Financial Instruments. This standard replaces the incurred loss methodology in current US generally accepted accounting principles (US GAAP) with a methodology that reflects expected credit losses and requires consideration of broader range of reasonable and supportable information to inform credit loss estimates.
Current US GAAP includes multiple credit impairment objects which generally delayed recognition of the full amount of credit losses until the loss was probable of occurring. The new standard will eliminate the probable initial recognition threshold and instead reflect an entity’s current estimate of all expected credit losses. Additionally, the new standard will broaden the information that an entity must consider in developing its estimated credit loss estimate for assets measured either collectively or individually.
The guidance in this update retains many of the disclosure standards in Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology.
For public business entities that are US Securities and Exchange Commission (SEC) filers, the amendments to this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
For all other public business entities, the amendments to this update are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.
An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.
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