Accounting for Credit Losses—ASU 2016‐13

• Author: Oscar J. Holzmann,Paul Munter
• Published date: 01 November 2016
• DOI: http://doi.org/10.1002/jcaf.22212
• Date: 01 November 2016

86

© 2016 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22212

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FASB

Accounting for Credit Losses—ASU

2016-13

Oscar J. Holzmann and Paul Munter

The Financial Accounting

Standards Board (FASB)

recently issued Accounting

Standard Update (ASU) 2016-

13, which will accelerate the

recognition of impairment

losses on financial instruments

for entities applying U.S. gen-

erally accepted accounting

principles (GAAP).1 Based

on extensive analysis and

outreach, the Board issued

this new standard to provide

users of financial statements

with what it believes is more

decision-useful information

about the credit risk inherent in

financial assets2 and the change

in expected credit losses occur-

ring during the period being

reported. TheBoard expects

this guidance to accomplish

thefollowing3:

• Result in an earlier recog-

nition of credit losses on

financial assets (including

trade receivables and lease

receivables) measured at

amortized cost.

• Result in greater transpar-

ency about the extent of

expected credit losses on

financial assets held at the

reporting date.

• Improve a user’s ability to

understand the realizability

of financial assets held at

each financial reporting

date.

• Improve a user’s ability

to understand changes in

expected credit losses that

have taken place during the

reporting period.

THE PROBABLE THRESHOLD

Under current U.S. GAAP,

estimated credit losses are

recognized when it is probable

that they have occurred. This

is referred to as the “incurred

loss” model. In contrast to the

incurred loss model, the new

guidance requires the imme-

diate recognition of lifetime

current expected credit losses

(referred to as the CECL

model) and therefore has

no recognition threshold. In

adopting this guidance, the

Board responded to input

from stakeholders who told the

Board that loss recognition is

unnecessarily delayed under the

incurred loss model when losses

fail to meet the “probable”

threshold. According to many

stakeholders, this reporting

delay results in an overstate-

ment of the carrying amount

of assets—particularly in times

when there is deterioration in

the credit cycle—which became

a more pronounced problem

during the global financial cri-

sis because “users were making

estimates of expected credit

losses and devaluing financial

institutions before accounting

losses were recognized, high-

lighting the different informa-

tion needs of users from what

was required by U.S. GAAP.”4

Even some financial institu-

tions objected to not being

allowed to book expected credit

losses that had not yet reached

the probable threshold in the

early stages of the financial

crisis.

In 2008, the FASB and

the International Account-

ing Standards Board (IASB)

created the Financial Crisis

Advisory Group (FCAG) to

help the Boards identify the

areas where improvements in