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Chapter 1 — Overview

1.3 Key Provisions of ASU 2016-13

1.3 Key Provisions of ASC 326

The table below highlights some of the key provisions of ASC 326 and includes links to sections of this Roadmap that discuss these provisions in more detail.
Topic
Key Provisions of ASC 326
Scope (Chapter 2)
ASC 326’s CECL model applies to:
  • Most debt instruments (other than those measured at fair value through net income).
  • Trade receivables and contract assets recognized under ASC 606.
  • Certain lease receivables.
  • Reinsurance receivables from insurance transactions.
  • Financial guarantee contracts.
  • Loan commitments.
AFS debt securities are outside the CECL model’s scope (see Chapter 7 for discussion of the impairment model for AFS debt securities).
Recognition threshold (Chapter 3)
None. Impairment is based on expected (rather than probable, incurred) credit losses.
Measurement (Chapter 4)
Entities have flexibility in measuring expected credit losses as long as the measurement results in an allowance that:
  • Reflects a risk of loss, even if remote.
  • Reflects losses that are expected over the contractual life of the asset.
  • Takes into account historical loss experience, current conditions, and reasonable and supportable forecasts.
The entity must evaluate financial assets on a collective (i.e., pool) basis if they share similar risk characteristics. If an asset’s risk characteristics are not similar to those of any of the entity’s other assets, the entity would evaluate the asset individually.
In December 2024, the FASB issued a proposed ASU that would introduce a practical expedient and accounting policy election for private companies and certain not-for-profit entities. See Section 9.2.2 for more information.
Application of the CECL model to off-balance-sheet commitments, trade and lease receivables, and reinsurance receivables (Chapter 5)
The CECL model affects off-balance-sheet commitments and the accounting for assets commonly found at nonbanks (e.g., certain trade and lease receivables and reinsurance receivables) and includes guidance that an entity should apply when accounting for such assets and liabilities.
PCD assets (Chapter 6)
The allowance for PCD assets is the estimate of CECL. Interest income recognition is based on the purchase price plus the initial allowance accreting to the contractual cash flows. The non-credit-related discount or premium that results from acquiring a pool of PCD assets is allocated to each individual financial asset.
On June 27, 2023, the FASB issued a proposed ASU that would expand the model for PCD assets to include all financial assets acquired in (1) a business combination, (2) an asset acquisition, or (3) the consolidation of a VIE that is not a business. The term PCD asset would be replaced with the term PFA.1 See Section 9.2.1 for updates on this proposal.
AFS debt securities (Chapter 7)
The CECL model does not apply to AFS debt securities. Provided that an entity does not have the intent to sell an impaired AFS debt security and that it is not more likely than not that the entity will be required to sell an impaired debt security before its recovery, the entity will recognize credit losses by using an allowance limited to the difference between a debt security’s amortized cost and its fair value.

Footnotes

1
AFS debt securities would be excluded from the PFA model. In addition, for financial assets acquired as a result of an asset acquisition or through consolidation of a VIE that is not a business, the asset acquirer would apply the gross-up approach to seasoned assets, which are acquired assets unless the asset is deemed akin to an in-substance origination. A seasoned asset is an asset (1) that is acquired more than 90 days after origination and (2) for which the asset acquirer was not involved with the origination.
2
The TRG comprised financial statement preparers, auditors, and users; FASB members also attended the group’s meetings. In addition, representatives from the SEC, PCAOB, Federal Reserve, Office of the Comptroller of the Currency (OCC), FDIC, National Credit Union Administration, and Federal Housing Finance Agency were invited to observe the meetings.