FASB Issues Transition Relief for Credit Losses Standard

Summary

The FASB issued ASU 2019-05[1] to allow entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. The new ASU is available here, and the effective dates and transition align with those of ASU 2016-13.

Background

In 2016, the FASB issued ASU 2016-13[2] (“credit losses standard”), requiring application of the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis. This methodology, generally referred to as CECL, replaces the previous incurred loss methodology. It also modifies the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis.

The FASB received feedback that certain entities have elected or plan to elect the fair value option on newly originated or purchased financial assets, although similar financial assets have historically been measured at amortized cost basis. The CECL methodology does not apply to financial instruments for which changes in fair value are recorded in the income statement, therefore it would not be applied to financial assets to which an entity elects the fair value option. Because the fair value option can generally only be elected when the financial asset is first recorded, these entities noted that electing the fair value option would require them to maintain dual measurement methods for those instruments—fair value measurements for new instruments and amortized cost basis, along with application of CECL, for existing similar financial instruments.

Main Provisions

ASU 2019-05 provides transition relief by providing entities with an alternative to irrevocably elect the fair value option for eligible financial assets measured at amortized cost upon adoption of the credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.[3]   The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities.

Effective Date and Transition

For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13.

For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings.

Have more questions?

Contact Us

 

Latest News

person looking at map for guidance

The IRS Issues More Guidance On The New Section 199A Pass-Through Deduction

In the late afternoon on Friday, January 18, 2019, the IRS issued in rapid-fire succession four documents concerning ...

drawing a dollar sign

IRS Says No “Clawback” When Estate and Gift Tax Basic Exclusion Amount Reverts to Old Limits

The Tax Cuts and Jobs Act temporarily doubled the value of assets that can be transferred without triggering ...

Section 199A Proposed Regulations Have Finally Arrived!

On August 8, the Internal Revenue Service issued much-anticipated proposed regulations (REG- 107892-18) (“Proposed Regulations”) concerning the deduction ...

HM&M Updates

HM&M Opens New Office in Frisco, Texas

HM&M is Going North             We are excited to announce our new office ...

Power to the People Networking Event | Panel of Experts including HM&M’s Carmel B. Wood, CPA

Power to the People A luxury happy hour networking event Join Leverage and its special panel of experts ...

HM&M moves up to #18 on the Dallas Business Journal list of top 25 largest accounting firms in north Texas

We are thrilled to continue growing in the Dallas metroplex! HM&M moves up to #18 on the Dallas ...