2.2 Scope Exclusions
ASC 326-20
15-3 The
guidance in this Subtopic does not apply to the following
items:
- Financial assets measured at fair value through net income
- Available-for-sale debt securities
- Loans made to participants by defined contribution employee benefit plans
- Policy loan receivables of an insurance entity
- Promises to give (pledges receivable) of a not-for-profit entity
- Loans and receivables between entities under common control.
- Receivables arising from operating leases accounted for in accordance with Topic 842.
ASC 326-20-15-3 lists a number of items that are outside the scope
of the credit losses guidance. For such items, impairment is recognized and measured
in accordance with other U.S. GAAP. One of these items is an operating lease
receivable (see ASC 326-20-15-3(g)), which is accounted for under ASC 842 rather
than ASC 326, as discussed below.
Changing Lanes
Billed Operating Lease
Receivables
In November 2018, the FASB issued ASU 2018-19 to
clarify certain aspects of the CECL model. Specifically, ASU 2018-19 states
that operating lease receivables are within the scope of ASC 842 rather than
ASC 326. That is, an entity would apply ASC 842 rather than ASC 326-20 to
account for changes in the collectibility assessment for operating leases.
An entity would recognize such changes as an adjustment to lease income in
accordance with ASC 842-30-25-13 rather than recognizing bad-debt expense.
We believe that the Board’s clarification that operating lease receivables
are within the scope of the collectibility guidance in ASC 842 rather than
ASC 326 may have resulted in a change in how some lessors accounted for the
collectibility of operating lease receivables upon adopting ASC 842.
Because of that change, lessors that adopted ASC 842 raised questions about
the appropriate accounting for operating lease receivables recognized by a
lessor that are or are expected to become impaired, since such receivables
are outside the scope of the impairment guidance in ASC 326. On the basis of
a technical inquiry with the FASB staff, we understand the following:
- ASC 842-30 requires entities to assess the probability of an individual customer’s (tenant’s) future payment.
- In addition to applying the guidance in ASC 842-30, an entity may elect to use a general or portfolio reserve approach (which is aligned with the legacy application of ASC 450-20).
- If a lessor elects to record a general reserve, the income statement impact may be recorded as a reduction to lease income or as bad-debt expense.
- Given the expected diversity in practice, consistent application and transparent disclosure of the policy elected are critical.
For more information about assessing and accounting for the
collectibility of operating lease receivables, see Deloitte’s July 1, 2019,
Financial Reporting
Alert.
2.2.1 Loans Held for Sale
The CECL model does not apply to held-for-sale (HFS) loans. An
entity is required to measure an HFS loan at the lower of amortized cost or fair
value in accordance with ASC 948. As discussed in Section 4.10, an entity that transfers a
loan from HFS to held for investment (HFI) must reverse any allowance previously
measured on the HFS loan, transfer the loan to the new classification category
(HFI), and establish a new allowance for expected credit losses by using the
measurement guidance in ASC 326.
2.2.2 Loans and Receivables Between Entities Under Common Control
Loans and receivables between entities under common control are
specifically excluded from the scope of the CECL model. At the June 2018 TRG meeting, the FASB staff indicated that this
scope exception applies to all common-control arrangements at all stand-alone
reporting levels (i.e., parent and subsidiaries); however, such application is
not specifically addressed in ASC 326.