Alert: FASB Accounting Standards Update No. 2016-13 - Financial Instruments: Credit Losses

Category: US GAAP

Alert: FASB Accounting Standards Update No. 2016-13 - Financial Instruments: Credit Losses

On June 16, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU seeks to improve the timeliness of the recognition of credit losses on loans and other financial instruments held by financial institutions and other organizations.

The amendments change the impairment methodology for financial instruments from an incurred loss methodology to one which requires recognition of expected credit losses based on historical experience, current conditions, and reasonable and supportable forecasts. It is expected that many entities may be able to continue to use their current loss estimation techniques. However, the inputs to those techniques will change to reflect the full amount of expected credit losses rather than only those that are probable. The changes also include enhanced qualitative and quantitative disclosures of the significant estimates and judgments used in estimating credit losses as well as the credit quality and underwriting standards of an entity’s portfolio. Furthermore, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased credit-impaired financial assets. The changes arise from a recommendation from the Financial Crisis Advisory Group (FCAG), established in 2008 jointly by FASB and the International Accounting Standards Board (IASB) in response to the global financial crisis.

Although there is consistency between International Financial Reporting Standard (IFRS) 9 Financial Instruments and the ASU with respect to the recognition of expected credit losses, ASU 2016-13 has a single measurement (i.e., “one bucket”) approach to evaluating lifetime expected credit losses versus a dual measurement (i.e., “three buckets”) approach under IFRS 9. FASB believes that the ASU’s current expected credit loss model will reduce the complexity of the United States’ Generally Accepted Accounting Principles (US GAAP) by decreasing the number of credit impairment models used to account for debt instruments.

The amendments are effective as follows:

  • Public business entities that are US Securities and Exchange Commission (SEC) filers – fiscal years beginning after December 15, 2019, including interim periods therein.
  • All other public business entities – fiscal years beginning after December 15, 2020, including interim periods therein.
  • All other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting – fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021.

Earlier adoption is allowed for all entities as of the fiscal years beginning after December 15, 2018, including interim periods therein. The modified-retrospective approach is used when applying the ASU with some exceptions.

To access the full script of ASU No. 2016-13, click here.

This communication contains a general overview of the topic and is current as of June 16, 2016. The application of the principles addressed will depend upon the particular facts and circumstances of each individual case. Accordingly, this publication is not a substitute for professional advice and we recommend that any decisions you take about the application or not of any of the information presented be made in consultation with a qualified professional, who can address any variance that may be required to reflect your circumstances. Please contact your local MNP representative for customized assistance with the application of this material. MNP LLP accepts no responsibility or liability for any loss related to any person's use of or reliance upon this material. © MNP LLP 2016. All rights reserved.

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Michelle Balmer

Michelle Balmer CPA, CA

Vice President, Assurance

Michelle Balmer, CPA, CA, is a Senior Assurance Services Partner with MNP. With 14 years of experience in public practice, Michelle helps a broad range of public and privately held companies in a variety of industries. She also works on special projects, including costing studies, benchmarking and best-practice studies, operational analyses, litigation support and due diligence.

As a key member of MNP's Assurance team, Michelle has played an instrumental role in assurance policy development, implementing accounting and assurance standards firm-wide and educating assurance practitioners regarding methodologies and new pronouncements. She also provides technical advice and consultation on accounting and assurance issues, as well as on rules of professional conduct issues, to all MNP practitioners.

Michelle was certified a Chartered Accountant (CA) after obtaining a Bachelor of Commerce degree from the University of Alberta. She has been actively involved with the Institute of Chartered Accountants of Alberta, including the Chartered Accountants School of Business, in an instructional and marketing capacity. An avid volunteer, she has assisted numerous groups such as the Easter Seals of Alberta, Paralympic Sports Association and Junior Achievement of Northern Alberta.