Alert: FASB Accounting Standards Update No. 2019-11 – Codification Improvements to Financial Instruments: Credit Losses

Category: US GAAP

Alert: FASB Accounting Standards Update No. 2019-11 – Codification Improvements to Financial Instruments: Credit Losses

On November 26, 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2019-11 Codification Improvements to Topic 326, Financial Instruments – Credit Losses. The amendments in this ASU clarify, correct errors in, improve, or address issues about certain topics related to the amendments in ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 was issued on June 16, 2016 and introduced an expected credit loss model for the impairment of financial assets measured at amortized cost basis.

The amendments are summarized as follows:

Expected Recoveries for Purchased Financial Assets with Credit Deterioration (PCD assets)

  • The ASU clarifies that the estimation of allowance for credit losses for PCD assets should include expected recoveries of amounts previously written off and expected to be written off. An allowance for credit losses added to the amortized cost basis of the financial asset should not exceed the aggregate of amounts previously written off and expected to be written off.
  • When a method other than a discounted cash flow method is used to estimate expected credit losses, expected recoveries should not include any amounts that result in an acceleration of the non-credit discount. An entity may include increases in expected cash flows after acquisition.

Transition Relief for Troubled Debt Restructurings (TDRs)

  • Entities are permitted to make an accounting policy election to calculate the prepayment-adjusted effective interest rate on pre-existing TDRs using prepayment assumptions that exist as of the date ASU 2016-13 is adopted, rather than the prepayment-adjusted effective interest rate immediately before the restructuring date.

Disclosures Relief for Accrued Interest Receivables

  • The ASU extends the disclosure relief for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis.

Financial Assets Secured by Collateral Maintenance Provisions

  • This ASU clarifies that when applying the practical expedient to measure the estimate of expected credit losses for financial assets secured by collateral maintenance provisions, an entity should evaluate whether it reasonably expects the borrower to be able to continually replenish collateral securing the financial asset. It is not necessary to consider remote scenarios in making this determination.
  • An entity should estimate the expected credit losses for any difference between the amount of the amortized cost basis that is greater than the fair value of the collateral securing the financial asset.

For entities that have not yet adopted ASU No. 2016-13, the effective dates and transition requirements are the same as for ASU No. 2016-13.

For entities that have adopted ASU No. 2016-13, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted. The amendments should be applied on a modified retrospective basis by means of a cumulative-effect adjustment to the opening retained earnings balance on the statement of financial position as of the date an entity adopted ASU No. 2016-13.

To access the full script of ASU No. 2019-11, click here.

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 November 26, 2019. 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 2019. 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.