1.2 Overview
ASU 2016-13 adds to U.S. GAAP an impairment model (known as the CECL
model) that is based on expected losses rather than incurred losses. Under the new
guidance, an entity recognizes as an allowance its estimate of expected credit losses,
which the FASB believes will result in more timely recognition of such losses. ASU
2016-13 is also intended to reduce the complexity of U.S. GAAP by decreasing the number
of credit impairment models that entities use to account for debt instruments.
Once effective (see Chapter 9 for a discussion of
the effective date), the new guidance will significantly change the accounting for
credit impairment. To comply with the ASU’s new requirements, banks and other entities
with certain asset portfolios (e.g., loans, leases, debt securities) will need to modify
their current processes for establishing an allowance for credit losses and
other-than-temporary impairments (OTTIs). Accordingly, they will need to make changes to
their operations and systems associated with credit modeling, regulatory compliance, and
technology.