1.3 Key Provisions of ASU 2016-13

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 July 2025, the FASB issued ASU 2025-05 to introduce a practical expedient (for all entities) and an accounting policy election (for non-PBEs that elect the practical expedient) that apply to estimating credit losses on current accounts receivable and current contract assets arising from revenue transactions under ASC 606. See Section 5.2.3 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.

Certain purchased assets (Chapter 6)

ASC 326-20 contains provisions that specifically apply to certain acquired financial assets — namely, financial assets that are purchased after undergoing credit deterioration (“PCD assets”) and acquired loans that are deemed “seasoned” at acquisition (“purchased seasoned loans” [PSLs]).

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 “gross-up” approach). The non-credit-related discount or premium that results from acquiring a pool of PCD assets is allocated to each individual financial asset.

In November 2025, the FASB issued ASU 2025-08, which expands the scope of financial assets subject to the gross-up approach under ASC 326 to include certain PSLs, as defined in the ASU. ASU 2025-08 is effective for annual reporting periods beginning after December 15, 2026, including interim reporting periods, and must be applied prospectively. Entities may early adopt the guidance “in an interim or annual reporting period in which financial statements have not yet been issued or made available for issuance.” An entity that adopts the amendments in an interim reporting period may apply them “as of the beginning of that interim reporting period or the beginning of the annual reporting period that includes that interim reporting period.”

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.