Chapter 1 — Overview
Chapter 1 — Overview
1.1 Background
The approach used to recognize impairment losses on financial assets
has long been identified as a major weakness in current U.S. GAAP, resulting in
delayed recognition of such losses and leading to increased scrutiny during the
financial crisis. After years of deliberating various models for remedying that
weakness (sometimes jointly with the International Accounting Standards Board
[IASB®]), the FASB issued its final standard on the measurement of
expected credit losses, ASU
2016-13 (codified as ASC 326), in 2016. The timeline below
depicts the stages in the Board’s development of that guidance, beginning with the
Financial Crisis Advisory Group’s (FCAG’s) recommendation, in 2008, that the FASB
and IASB develop a credit loss model that incorporates forward-looking information
and eliminates barriers to the timely recognition of losses under incurred loss
models.
1.1.1 CECL Model Timeline
|
2008
|
FCAG recommends that FASB and IASB
jointly explore alternatives to the incurred loss model
that would use more forward-looking information and
would eliminate the delayed recognition of credit
losses.
|
|
2009
|
IASB issues exposure draft (ED) on amortized
cost and impairment related to financial instruments
(November).
|
|
2010
|
FASB issues proposed ASU on accounting for
financial instruments and revisions to the accounting
for derivative instruments and hedging activities
(May).
|
|
2011
|
FASB and IASB jointly issue a
supplementary document on
accounting for financial instruments and revisions to
the accounting for derivative instruments and hedging
activities — impairment (January).
|
|
2012
|
FASB decides to no longer pursue a
converged standard and issues a proposed ASU on credit losses (ASC
825-15) (December).
|
|
2013
|
IASB issues ED on expected credit losses
(March).
|
|
2014
|
IASB issues final guidance by adding to
IFRS 9 impairment requirements related to the accounting
for an entity’s expected credit losses (July).
|
|
2016
|
FASB issues final credit losses
standard, ASU 2016-13, codified as ASC 326 (June).
|
|
2018
|
FASB issues ASU 2018-19, which contains
Codification improvements to ASC 326 (November).
|
|
2019
|
FASB issues ASU 2019-04, which contains
Codification improvements to ASC 326, ASC 815, and ASC
825 (April).
FASB issues ASU 2019-05, which provides
targeted transition relief to entities that are adopting
ASC 326 (May).
FASB issues ASU 2019-10 to change effective
dates for new accounting standards (November).
FASB issues ASU 2019-11 on additional
Codification improvements to ASC 326 (November).
|
|
2020
|
FASB issues ASU
2020-02 to make certain amendments
to SEC paragraphs in accordance with SAB 119 (February).
FASB issues ASU
2020-03 on additional Codification
improvements to financial instruments (March).
|
|
2022
|
FASB issues ASU
2022-01 to clarify hedge accounting
guidance (March).
FASB issues ASU
2022-02 on (1) TDRs by creditors and
(2) vintage disclosures (March).
|
|
2023
|
FASB issues proposed ASU on
purchased financial assets (PFAs) (June).
|
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.
1.3 Key Provisions of ASU 2016-13
The table below highlights some of the
key provisions of ASU 2016-13 and includes links to sections of this Roadmap that
discuss these provisions in more detail.
|
Topic
|
Key Provisions of ASU 2016-13
|
|---|---|
|
Scope (Chapter 2)
|
The ASU applies to:
AFS debt securities are outside the ASU’s scope
(see Chapter
7 for discussion of targeted changes made to 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:
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.
|
|
Application of the CECL model to off-balance-sheet commitments,
trade and lease receivables, and reinsurance receivables
(Chapter 5)
|
The CECL model affects the accounting for assets commonly found
at nonbanks and includes guidance that an entity should apply
when accounting for such assets.
|
|
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
|
|
AFS debt securities (Chapter
7)
|
The CECL model does not apply to AFS debt securities. However,
the FASB made targeted improvements to existing guidance,
including removing the OTTI concept and requiring the use of an
allowance limited to the difference between a debt security’s
amortized cost and its fair value.
|
Shortly before issuing ASU 2016-13, the FASB formed a credit losses
TRG.2 Although the group does not issue guidance, it provides feedback on potential
issues related to the implementation of the CECL model. By analyzing and discussing such
issues, the TRG helps the Board determine whether it needs to take action, such as
providing clarification or issuing additional guidance.
On the basis of feedback received from the TRG and other stakeholders
since the issuance of ASU 2016-13, the Board has thus far issued eight final ASUs (this
number does not include ASU 2022-01) in
an attempt to (1) clarify the guidance in ASU 2016-13 and (2) provide relief from the
costs of implementing the standard. The effective dates of the final ASUs are aligned
with that of ASU 2016-13. See Chapter
10 for more information about recent FASB activities.
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 comprises financial statement preparers, auditors, and
users; FASB members also attend 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 are invited to observe the meetings.