Alert: FASB Accounting Standards Update No. 2020-03 – Codification Improvements to Financial Instruments

Category: US GAAP

Alert: FASB Accounting Standards Update No. 2020-03 – Codification Improvements to Financial Instruments

On March 9, 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-03 Codification Improvements to Financial Instruments. This ASU is part of the FASB’s ongoing project for improving the Codification or correcting its unintended application.

The amendments in this ASU, as summarized by topic area below, affect various aspects of the financial instruments guidance, including the current expected credit losses standard guidance:

Amendments to ASU No. 2016-13Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

  • The contractual term used to measure expected credit losses under Topic 326 is amended to align with the contractual term of a net investment in a lease under Topic 842, Leases.
  • Subtopic 860-20, Transfers and Servicing – Sales of Financial Assets is amended to clarify that an allowance for credit losses should be recorded in accordance with Topic 326 when an entity regains control of sold financial assets.
    • These amendments are effective as follows:
      • For entities that have not yet adopted the guidance in ASU 2016-13 – at the same time as the effective date of ASU 2016-13.
      • For entities that have adopted the guidance in ASU 2016-13 – for fiscal years beginning after December 15, 2019, including interim periods therein.

Other Conforming Amendments

  • Subtopic 825-10, Financial Instruments - Overall is clarified to state that all entities are required to provide the fair value option disclosures in where the fair value option is elected.
  • Topic 820, Fair Value Measurement – Overall – Subsequent Measurement is amended to reflect that nonfinancial items accounted for as derivatives can apply the portfolio exception.
  • Other clarifications and cross-references added in Subtopic 470-50, Debt – Modifications and Extinguishments and Subtopic 820-10, Fair Value Measurement – Overall.
    • These three conforming amendments are effective as follows:
      • For public business entities – upon issuance.
      • For all other entities – for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years beginning after December 15, 2020, with early adoption permitted.
    • Additional clarification is provided that the disclosure requirements in Topic 320, Investments – Debt and Equity Securities apply to the disclosure of debt securities for depository and lending institutions under Topic 942, Financial Services – Depository and Lending.
      • This conforming amendment affects the guidance in ASU No. 2019-04 Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The effective date of the amendments in this ASU coincide with the effective date of ASU No. 2019-04 for fiscal years beginning after December 15, 2019, including interim periods therein.

To access the full script of ASU No. 2020-03, click here.

This communication contains a general overview of the topic and is current as of March 9, 2020. 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 2020. All rights reserved.

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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.