In addition, the FASB continued making progress on its project on the PCD accounting model. Early adoption is permitted in certain circumstances.
For entities that have not yet adopted ASU 2016-13, the amendments in ASU 2022-02 are effective upon adoption of ASU 2016-13.
For entities that have already adopted ASU 2016-13, the amendments in ASU 2022-02 are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As a result of that feedback, on March 31, 2022, the FASB issued ASU 2022-02, which eliminates the accounting guidance on TDRs for creditors in ASC 310-40 and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination. This method is commonly used to estimate the allowance for bad debts on trade receivables.Īlthough the FASB has issued several ASUs that amend certain aspects of ASU 2016-13, the Board continues to seek feedback on the new guidance.
The table below summarizes various measurement approaches that an entity could use to estimate expected credit losses under ASU 2016-13.Įxpected credit losses are determined by comparing the asset’s amortized cost with the present value of the estimated future principal and interest cash flows.Įxpected credit losses are determined by applying an estimated loss rate to the asset’s amortized cost basis.Įxpected credit losses are determined by using historical trends in credit quality indicators (e.g., delinquency, risk ratings).Įxpected credit losses are determined by multiplying the probability of default (i.e., the probability the asset will default within the given time frame) by the loss given default (the percentage of the asset not expected to be collected because of default).Įxpected credit losses are determined on the basis of how long a receivable has been outstanding (e.g., under 30 days, 31–60 days). Nonbanks that have yet to adopt the guidance should (1) focus on identifying which financial instruments and other assets are subject to the CECL model and (2) evaluate whether they need to make changes to existing credit impairment models to comply with the new standard. While banks and other financial institutions (e.g., credit unions and certain asset portfolio companies) have been closely following standard-setting activities related to the new CECL standard, are actively engaged in discussions with the FASB and the transition resource group (TDR), and are far along in the implementation process, many nonbanks may not have started evaluating the effect of the CECL model. Although the new CECL standard has a greater impact on banks, most nonbanks have financial instruments or other assets (e.g., trade receivables, contract assets, lease receivables, financial guarantees, loans and loan commitments, and held-to-maturity debt securities) that are subject to the CECL model.
CREDIT INSIGHTS PLUS
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