Chapter 9 — Effective Date and Transition

9.1 Effective Dates

ASC 326-10

65-1 The following represents the transition and effective date information related to Accounting Standards Updates No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, No. 2018-19, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, No. 2019-04, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, No. 2019-05, Financial Instruments — Credit Losses (Topic 326): Targeted Transition Relief, No. 2019-10, Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, No. 2019-11, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, and No. 2022-02, Financial Instruments — Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures:

The pending content that links to this paragraph shall be effective as follows:
1. For public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The one-time determination of whether an entity is eligible to be a smaller reporting company shall be based on an entity’s most recent determination as of November 15, 2019, in accordance with SEC regulations.
2. Subparagraph superseded by Accounting Standards Update No. 2019-10.
3. For all other entities, for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.
Early application of the pending content that links to this paragraph is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

Note: See paragraph 250-10-S99-6 on disclosure of the impact that recently issued accounting standards will have on the financial statements of a registrant. . . .

9.1.1 Effective Date of ASU 2016-13, as Amended by ASU 2019-10

The effective date of ASU 2016-13, as amended by ASU 2019-10, depends on the nature of the reporting entity:

For SEC filers,1 excluding those that meet the definition of a smaller reporting company (SRC),2 the ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years (“Bucket 1”).
For all other entities, the ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years (“Bucket 2”).

In addition, entities are permitted to early adopt the new guidance for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

9.1.2 Effective Dates of ASU 2019-04, ASU 2019-05, and ASU 2019-11

For entities that have adopted ASU 2016-13, the amendments in ASU 2019-04, ASU 2019-05, and ASU 2019-11 are effective for fiscal years beginning after December 15, 2019, and interim periods therein. An entity may early adopt ASU 2019-04, ASU 2019-05, and ASU 2019-11 in any interim period after their issuance if the entity has adopted ASU 2016-13. ASU 2019-04 states that the amendments should be applied “on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening retained earnings balance in the statement of financial position as of the date an entity adopted the amendments in Update 2016-13.”

For all other entities, the effective date will be the same as the effective date in ASU 2016-13.

9.1.3 Effective Date of ASU 2022-02

For entities that have already adopted ASU 2016-13, the amendments in ASU 2022-02 are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the amendments in ASU 2022-02 are effective upon adoption of ASU 2016-13.

Entities are permitted to early adopt the amendments in ASU 2022-02, including adoption in any interim period, provided that the amendments are adopted as of the beginning of the annual reporting period that includes the interim period of adoption. In addition, entities are permitted to elect to early adopt the amendments to TDR accounting and the related disclosure enhancements separately from the amendments to the vintage disclosure requirements.

Entities may elect to apply the updated guidance on TDR recognition and measurement by using a modified retrospective transition method, which would result in a cumulative-effect adjustment to retained earnings, or to adopt the amendments prospectively. If an entity elects to adopt the updated guidance on TDR recognition and measurement prospectively, the guidance should be applied to modifications occurring after the date of adoption. The amendments on TDR disclosures and vintage disclosures should be adopted prospectively.

9.1.4 Emerging Growth Companies

As noted in Topic 10 of the SEC’s Financial Reporting Manual, “Title I of the [Jumpstart Our Business Startups (JOBS)] Act, which was effective as of April 5, 2012, created a new category of issuers called ‘emerging growth companies, or EGCs’ whose financial reporting and disclosure requirements in certain areas differ from [those of] other categories of issuers.” For example, under SEC rules, an EGC is not required to comply with new or revised accounting standards as of the effective dates for PBEs and may elect to take advantage of the extended transition provisions by applying non-PBE (or private-company) adoption dates for as long as the issuer qualifies as an EGC.

During the 2019 AICPA Conference on Current SEC and PCAOB Developments, SEC Division Deputy Chief Accountant Lindsay McCord addressed transition requirements related to the adoption of the credit losses standard for EGCs. She clarified that ASU 2019-10 does not benefit non-SRC, EGC registrants that plan to adopt a new standard by using Bucket 2 adoption dates but subsequently lose their EGC status. Therefore, a registrant’s loss of EGC status before the non-PBE adoption date (Bucket 2) would affect its adoption date of a new standard.

In a manner consistent with the circumstances addressed in Ms. McCord’s remarks and our understanding of the requirements, the example below illustrates the application of the transition requirements related to the adoption of the credit losses standard. Although not explicitly discussed by the SEC staff, the scenario addressed in Example 9-2 further demonstrates our understanding of the transition requirements related to situations in which a registrant loses EGC status after the end of the year containing the Bucket 1 adoption date.

Example 9-1

Calendar-Year-End Non-SRC Registrant Loses Its EGC Status on December 31, 2020

Assume that a non-SRC registrant is a calendar-year-end EGC that has elected to take advantage of the extended transition provisions and adopt the credit losses standard by applying private-company adoption dates (Bucket 2).

A registrant that loses its EGC status on December 31, 2020, should do the following:

Adopt ASC 326 for the annual period beginning on January 1, 2020.
First present the application of ASC 326 in its 2020 annual financial statements included in its 2020 Form 10-K.
Present the application of ASC 326 in its selected quarterly financial data (SEC Regulation S-K, Item 302(a)) for its 2020 quarterly periods in its 2020 Form 10-K. Further, we believe that the registrant should provide clear and transparent disclosures that the quarterly financial data presented in its 2020 Form 10-K do not mirror the information in its 2020 Forms 10-Q for the current year.
Present the application of ASC 326 in its quarterly interim financial statements for its comparable 2020 quarterly periods presented in Forms 10-Q in 2021.

Example 9-2

Calendar-Year-End Non-SRC Registrant Loses Its EGC Status on December 31, 2021

Assume the same facts as in the example above except that the registrant loses its EGC status on December 31, 2021. The registrant should do the following:

Adopt ASC 326 for the annual period beginning on January 1, 2021.
First present the application of ASC 326 in its 2021 annual financial statements included in its 2021 Form 10-K.
Present the application of ASC 326 in its selected quarterly financial data (SEC Regulation S-K, Item 302(a)) for its 2021 quarterly periods in its 2021 Form 10-K. Further, we believe that the registrant should provide clear and transparent disclosures that the quarterly financial data presented in its 2021 Form 10-K do not mirror the information in its 2021 Forms 10-Q for the current year.
Present the application of ASC 326 in its quarterly interim financial statements for its comparable 2021 quarterly periods presented in Forms 10-Q in 2022.

Footnotes

The ASC master glossary defines an SEC filer as follows:

An entity that is required to file or furnish its financial statements with either of the following:

The Securities and Exchange Commission (SEC)
With respect to an entity subject to Section 12(i) of the Securities Exchange Act of 1934, as amended, the appropriate agency under that Section.

Financial statements for other entities that are not otherwise SEC filers whose financial statements are included in a submission by another SEC filer are not included within this definition.

SEC Regulation S-K, Item 10(f)(1), defines an SRC, in part, as:

[A]n issuer that is not an investment company, an asset-backed issuer (as defined in § 229.1101), or a majority-owned subsidiary of a parent that is not a smaller reporting company and that:

(i) Had a public float of less than $250 million; or

(ii) Had annual revenues of less than $100 million and either:

(A) No public float; or

(B) A public float of less than $700 million.

9.2 Transition Approach

ASC 326-10

65-1 The following represents the transition and effective date information related to Accounting Standards Updates No. 2016-13 . . .

c. An entity shall apply the pending content that links to this paragraph by means of a cumulative-effect adjustment to the opening retained earnings as of the beginning of the first reporting period in which the pending content that links to this paragraph is effective.

d. An entity shall apply prospectively the pending content that links to this paragraph for purchased financial assets with credit deterioration to financial assets for which Subtopic 310-30 was previously applied. The prospective application will result in an adjustment to the amortized cost basis of the financial asset to reflect the addition of the allowance for credit losses at the date of adoption. An entity shall not reassess whether recognized financial assets meet the criteria of a purchased financial asset with credit deterioration as of the date of adoption. An entity may elect to maintain pools of loans accounted for under Subtopic 310-30 at adoption. An entity shall not reassess whether modifications to individual acquired financial assets accounted for in pools are troubled debt restructurings as of the date of adoption. The noncredit discount or premium, after the adjustment for the allowance for credit losses, shall be accreted to interest income using the interest method based on the effective interest rate determined after the adjustment for credit losses at the adoption date. The same transition requirements should be applied to beneficial interests for which Subtopic 310-30 was applied previously or for which there is a significant difference between the contractual cash flows and expected cash flows at the date of recognition.

e. An entity shall apply prospectively the pending content that links to this paragraph to debt securities for which an other-than-temporary impairment had been recognized before the date of adoption, such that the amortized cost basis (including previous write-downs) of the debt security is unchanged. In addition, the effective interest rate on a security will remain unchanged as a result of the adoption of the pending content that links to this paragraph. Amounts previously recognized in accumulated other comprehensive income as of the adoption date that relate to improvements in cash flows will continue to be accreted to interest income over the remaining life of the debt security on a level-yield basis. Recoveries of amounts previously written off relating to improvements in cash flows after the date of adoption shall be recorded to income in the period received. . . .

j. An entity that adjusts the effective interest rate used to discount expected cash flows to consider the timing (and changes in timing) of expected cash flows resulting from expected prepayments in accordance with paragraphs 326-20-30-4 through 30-4A for troubled debt restructurings that exist as of the date of adoption may, as an accounting policy election, calculate the prepayment-adjusted effective interest rate using the original contractual rate and the prepayment assumptions as of the date of adoption.

For most debt instruments, entities must record a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective (modified retrospective approach). However, ASU 2016-13 provides the following instrument-specific transition guidance:

Other-than-temporarily impaired debt securities — An entity must prospectively apply (1) the CECL model to HTM debt securities and (2) the changes to the impairment model for AFS debt securities. As a result, previous write-downs of a debt security’s amortized cost basis would not be reversed; rather, only cumulative unfavorable changes in the estimate of expected cash flows of the debt security occurring on or after the ASU’s effective date would be reflected as an allowance for credit losses. Upon adopting the guidance, an entity would continue to accrete into interest income any amounts previously recognized in OCI before the effective date that are related to improvements in expected cash flows. In addition, an entity would recognize in the period in which they are received recoveries of amounts that were previously written off before adoption of the guidance. An entity would recognize such write-offs in a manner consistent with how it would recognize recoveries on amounts written off after adopting the guidance (see Section 4.5.2).
PCD assets — An entity is required to apply the changes to PCD assets prospectively. That is, the change in the definition of a PCD asset applies only to assets acquired on or after the ASU’s effective date. For debt instruments accounted for under ASC 310-30, an entity would apply the gross-up approach as of the transition date (i.e., establish an allowance for expected credit losses and make a corresponding adjustment to the debt instrument’s cost basis).

In addition, an entity would immediately recognize any postadoption changes to the estimate of cash flows that it expects to collect (favorable or unfavorable) in the income statement as credit loss expense (or as a reduction of expense). Accordingly, the yield on a PCD asset as of the date of adoption would be “locked” and would not be affected by subsequent changes in the entity’s estimate of expected credit losses.
Certain BIs within the scope of ASC 325-40 — ASC 326-10-65-1 states that entities holding “beneficial interests for which Subtopic 310-30 was applied previously or for which there is a significant difference between the contractual cash flows and expected cash flows at the date of recognition” would apply the same transition requirements as those that apply to PCD assets.
TDRs for which the EIRs are adjusted for prepayments — ASU 2019-11 amended ASU 2016-13 to allow entities to calculate the prepayment-adjusted EIR on preexisting TDRs by using the prepayment assumptions that exist as of the date on which an entity adopts ASU 2016-13, instead of the prepayment-adjusted EIR immediately before the restructuring date.3

9.2.1 Applying the Transition Guidance to Pools of PCI Assets Under ASC 310-30

ASC 326-10-65-1(d) allows entities to “elect to maintain pools of loans accounted for under Subtopic 310-30 at adoption.” Under current U.S. GAAP, entities are permitted to (1) pool PCI assets acquired in the same fiscal quarter that have similar risk characteristics and (2) use a composite interest rate to estimate the cash flows expected to be collected by the pool. In addition, under ASC 310-30-40-1 (which was superseded by ASU 2016-13), pools of loans must be maintained, and loans may be removed from a pool only in limited circumstances (e.g., sale of a loan, receipt of assets in satisfaction of a loan, a loan write-off).

If a TDR occurs on a loan accounted for in a pool, entities still apply ASC 310-30 to the pool and do not apply TDR accounting to the individual loan. Under ASC 326-20-30-2 (added by ASU 2016-13), entities are required to reevaluate the characteristics of the assets in the pool and remove assets that no longer have similar characteristics. In other words, if an asset that was considered to be a PCI asset at transition no longer has characteristics that are similar to those of the rest of the assets in the pool, that asset should be removed and placed in a different pool containing loans with similar risk characteristics.

At its June 2017 meeting, the TRG noted that while the transition guidance permits entities to elect to maintain pools of loans accounted for under ASC 310-30, ASU 2016-13 is unclear on the extent to which entities can continue to apply the guidance in ASC 310-30 to these pools. However, TRG members generally agreed that entities have the choice of maintaining their existing pools accounted for under ASC 310-30 either at adoption only or on an ongoing basis after adoption. Note that if an entity elects to maintain pools of loans accounted for under ASC 310-30, it would continue to estimate its expected credit losses by using a DCF approach, as it did when applying ASC 310-30 before the adoption of ASU 2016-13.

Furthermore, the FASB staff noted in TRG Memo 6 that an entity’s approach to maintaining its existing pools should be determined on a pool-by-pool basis. The staff also stated:

[A]s part of complying with the disclosure requirements in paragraphs 326-20-50-10 through 50-11, any entity that [maintains its existing pools on an ongoing basis] should evaluate the need for disclosure of their election to maintain pools and any additional qualitative or quantitative information that may be necessary for a financial statement user to understand the size and nature of former Subtopic 310-30 pools. Additionally, an entity would need to consider disclosure of the accounting policies that are in place for these pools that are different from other assets held by the entity.

9.2.2 Transition for PCD AFS Debt Securities

Questions have arisen regarding how an entity should apply the transition provisions of ASU 2016-13 to an AFS debt security with an unrealized gain that was previously accounted for in accordance with ASC 310-30. ASC 326-10-65-1(d) provides transition guidance related to PFAs with credit deterioration and states:

An entity shall apply prospectively the pending content that links to this paragraph for purchased financial assets with credit deterioration to financial assets for which Subtopic 310-30 was previously applied. The prospective application will result in an adjustment to the amortized cost basis of the financial asset to reflect the addition of the allowance for credit losses at the date of adoption. An entity shall not reassess whether recognized financial assets meet the criteria of a purchased financial asset with credit deterioration as of the date of adoption. An entity may elect to maintain pools of loans accounted for under Subtopic 310-30 at adoption. An entity shall not reassess whether modifications to individual acquired financial assets accounted for in pools are troubled debt restructurings as of the date of adoption. The noncredit discount or premium, after the adjustment for the allowance for credit losses, shall be accreted to interest income using the interest method based on the effective interest rate determined after the adjustment for credit losses at the adoption date. The same transition requirements should be applied to beneficial interests for which Subtopic 310-30 was applied previously or for which there is a significant difference between the contractual cash flows and expected cash flows at the date of recognition.

Example 9-3

Entity ABC purchases a debt security with a par/UPB of $1,000 and a fair value of $600 (before the adoption of ASU 2016-13). Entity ABC classifies the debt security as AFS in accordance with ASC 320. The discount on the security is partially due to a deterioration in credit since its issuance and therefore is within the scope of ASC 310-30. At the time of purchase, the credit portion of the discount is $150 and the noncredit discount (also known as the “accretable yield”) is $250. Market interest rates have dropped since the debt security was acquired by ABC, but the expected cash flows are unchanged. As a result, immediately before the adoption of ASU 2016-13, the amortized cost basis has increased to $675 through accretion but the fair value is $700.

In this scenario, ABC might conclude that it should increase the amortized cost basis by $150, with an offsetting credit of $150 as an allowance for credit losses. However, ASC 326-30 governs the accounting for credit losses for AFS debt securities. Under ASC 326-30-35-1, “[a]n investment is impaired if the fair value of the investment is less than its amortized cost basis.” In addition, under ASC 326-30-35-2, if an investment in an AFS debt security is impaired, the allowance for credit losses is “limited by the amount that the fair value is less than the amortized cost basis.” If ABC were to gross up the debt security in such a way that the amortized cost basis is now $825 ($675 + $150), but the fair value is $700, ABC would be limited to having an allowance for credit losses of $125 ($825 – $700).

On the basis of discussions with the FASB staff, we understand that it would be appropriate for an entity to apply the guidance in ASC 326-30-35-1 in determining whether an allowance for credit losses is required upon the adoption of ASU 2016-13. In other words, if an AFS debt security has a fair value that is greater than its amortized cost as of the date of adoption, that AFS debt security is not impaired. Accordingly, the entity would not adjust the amortized cost basis of the AFS debt security upon adopting ASU 2016-13 and would not establish an allowance for credit losses. With respect to the entity in this example, the AFS debt security would continue to have an amortized cost basis of $675 and no allowance for credit losses. In addition, the noncredit discount would remain at $175 ($250 at inception minus $75 of accretion before adoption).

If a PCD AFS debt security has an unrealized loss as of the date of adoption, the amortized cost basis of the security should be adjusted for the allowance for credit losses required by ASC 326-30 at transition (the full “gross up” model).

9.2.3 Transition Relief by Providing the Fair Value Option

ASC 326-10

65-1 The following represents the transition and effective date information related to Accounting Standards Updates No. 2016-13 . . .

i. An entity may irrevocably elect the fair value option in accordance with Subtopic 825-10 for financial instruments within the scope of Subtopic 326-20, except for those financial assets in paragraph 326-20-15-2(a)(2), that also are eligible items in Subtopic 825-10.

In May 2019, the FASB issued ASU 2019-05 to allow companies to irrevocably elect, upon adopting ASU 2016-13, the fair value option for financial instruments that were previously recorded at amortized cost and are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. The entity would make this election on an instrument-by-instrument basis. For the effective date of ASU 2019-05, see Section 9.1.

9.2.4 Transition for Financial Guarantees Within the Scope of ASC 326-20

As discussed in Chapter 5, for guarantees within the scope of ASC 326-20, the guarantor is required to recognize (1) the fair value of the obligation related to the noncontingent portion of the guarantee and (2) an estimate of expected credit losses in accordance with ASC 326-20 on the contingent obligation related to the guarantee.

Before the adoption of ASU 2016-13, a guarantor was not required to bifurcate and separately account for the contingent and noncontingent aspects of a financial guarantee under ASC 460. Rather, the guarantor was required to initially recognize the guarantee liability at the greater of the following:

The noncontingent liability stand-ready obligation of the guarantee measured at fair value in accordance with ASC 460-10-30-2.
The contingent liability measured in accordance with ASC 450-20-30.

ASC 460 distinguishes between the noncontingent “stand ready” obligation associated with a guarantee (accounted for under ASC 460) and the contingent obligation associated with a guarantee (accounted for under ASC 450-20). The ASC 460 liability, established at the inception of a guarantee, generally represents unearned income related to the noncontingent liability (premium charged for standing ready) and, as noted in ASC 460-10-35-1 and 35-2, is typically reduced by a credit to earnings because the guarantor is released from risk under the guarantee. ASC 450-20, on the other hand, provides guidance on establishing a liability for a loss contingency, which represents an estimate of an entity’s probable future obligation related to an incurred loss. The ASC 450-20 liability is subsequently measured on the basis of facts and circumstances specific to the contingency, and the related loss is recorded apart from the credit to earnings recognized under ASC 460.

Neither ASC 460 nor ASC 450-20 provides explicit guidance on the interaction between ASC 460 and ASC 450-20 after initial recognition. Accordingly, entities generally established a systematic and rational method with a reasonable basis for supporting subsequent accounting. The following is a discussion of two different methods that entities have applied in practice to determine the amount of an ASC 450-20 liability to record:

Method 1: Incremental recognition of the ASC 450-20 contingent liability — After initial recognition, an entity would record a separate ASC 450-20 liability only when the entire estimated ASC 450-20 amount exceeds the unamortized ASC 460 liability. The ASC 450-20 liability equals the excess of the entire estimated probable obligation over (1) the unamortized ASC 460 liability or (2) the expected unamortized ASC 460 liability at the time of the expected payment. In subsequent periods, the ASC 450-20 liability may need to be adjusted so that it continues to equal the excess of the entire estimated probable obligation over the unamortized ASC 460 liability.
Method 2: Gross recognition of the ASC 450-20 contingent liability — Under this method, after the initial recognition and measurement of the guarantee, an entity would record a separate ASC 450-20 liability for the entire amount of the estimated probable obligation. The entity would continue to amortize the ASC 460 liability in accordance with its established policy until the entity is released from its obligation to stand ready.

ASU 2016-13 amended ASC 460-10-35-4 to require an entity to account for a guarantee that is within the scope of ASC 326-20 in a manner consistent with Method 2 discussed above (i.e., the contingent and noncontingent liabilities are recognized on a gross basis), although the measurement of that contingent liability should be calculated in accordance with ASC 326-20. Accordingly, the transition adjustments that an entity adopting ASU 2016-13 is required to make in connection with the contingent liability of a guarantee within the scope of ASC 326-20 will depend on the following factors:

Whether a contingent liability was recognized before the adoption of ASU 2016-13.
If a contingent liability was recognized before the adoption of ASU 2016-13, whether it was measured by using Method 1 or Method 2 above.
Whether the contingent liability must now be measured on the basis of CECL in accordance with ASC 326-20 instead of by using the best estimate required under ASC 450-20.

Example 9-4

Transition Adjustments Upon Adoption of ASU 2016-13

Scenario 1 — Guarantor Recognized the Noncontingent Obligation in Accordance With ASC 460 Before Adoption of ASU 2016-13

Entity X is a guarantor of debt incurred by Entity Y. The guarantee arrangement stipulates that X must guarantee payment of 100 percent of Y’s debt obligations borrowed from a third-party debtor for a specified time frame. Entity X is not an insurance entity, and the guarantee is not within the scope of ASC 815.

On January 1, 20X9, Y borrows $1 million from a third-party debtor for which X is obligated to guarantee repayment under the guarantee arrangement. The debt matures in five years, and X’s guarantee arrangement covers the entire debt term. Entity X receives an up-front cash premium payment of $25,000 for the guarantee, and the cash premium is considered to be at arm’s length. Entity X measures and recognizes the fair value of its stand-ready obligation (i.e., the noncontingent obligation) to guarantee Y’s repayment under the debt arrangement to be $25,000 on the basis of the arm’s-length premium it received. That is, the cash premium that X received was greater than the contingent liability amount that needed to be recognized at the inception of the guarantee in accordance with ASC 450-20-30.

Entity X’s subsequent-measurement accounting policy for the guarantee liability is to amortize the obligation on a straight-line basis over the life of the guarantee, which is equal to the term of the debt (i.e., five years). As of December 31, 20X9, the unamortized guarantee obligation is $20,000.

Upon adoption of ASU 2016-13 on January 1, 20Y0, X determines that this guarantee is within the scope of ASC 326-20 and measures the contingent obligation to be $50,000 in accordance with the guidance in ASC 326-20. The table below summarizes the facts in Scenario 1.

On January 1, 20Y0, X would record the following journal entry related to the contingent obligation associated with the guarantee:

Journal Entry: January 1, 20Y0

Note: The contingent obligation is measured and recognized in accordance with ASC 326-20 upon adoption of ASU 2016-13. The noncontingent obligation that was recorded before the adoption of ASU 2016-13 is not adjusted upon adoption of ASU 2016-13.

Scenario 2 — Guarantor Recognized Both a Noncontingent and Contingent Obligation in Accordance With ASC 460 and ASC 450-20 Before Adoption of ASU 2016-13

Assume the same facts as in Scenario 1 above, except that X recorded a contingent obligation amount after the inception of the guarantee under ASC 450-20 in accordance with ASC 460-10-35-4 (i.e., gross recognition of the ASC 450-20 liability). That is, after the initial recognition and measurement of the guarantee, X separately recorded an ASC 450-20 liability for the entire amount of the estimated contingent obligation and recognized the establishment of that liability in earnings.

The unamortized noncontingent obligation as of December 31, 20X9, is $20,000, and the contingent obligation recognized under ASC 450-20 is $30,000. Upon adopting ASU 2016-13 on January 1, 20Y0, X determines that this guarantee is within the scope of ASC 326-20 and measures the contingent obligation to be $50,000 in accordance with the guidance in ASC 326-20. The table below summarizes the facts in Scenario 2.

On January 1, 20Y0, X would record the following journal entry related to the contingent obligation associated with the guarantee.

Journal Entry: January 1, 20Y0

Note: The contingent obligation is remeasured and recognized in accordance with ASC 326-20 upon adoption of ASU 2016-13. The noncontingent obligation that was recorded before the adoption of ASU 2016-13 is not adjusted upon adoption of ASU 2016-13.

9.2.5 Transition Disclosures

ASC 326-10

65-1 The following represents the transition and effective date information related to Accounting Standards Updates No. 2016-13 . . .

f. An entity shall disclose the following in the period that the entity adopts the pending content that links to this paragraph:

1. The nature of the change in accounting principle, including an explanation of the newly adopted accounting principle.

2. The method of applying the change.

3. The effect of the adoption on any line item in the statement of financial position, if material, as of the beginning of the first period for which the pending content that links to this paragraph is effective. Presentation of the effect on financial statement subtotals is not required.

4. The cumulative effect of the change on retained earnings or other components of equity in the statement of financial position as of the beginning of the first period for which the pending content that links to this paragraph is effective.

g. An entity that issues interim financial statements shall provide the disclosures in (f) in each interim financial statement of the year of change and the annual financial statement of the period of the change.

h. In the year of initial application of the pending content that links to this paragraph, a public business entity that is not within the scope of paragraph 326-10-65-1(a)(1) may phase-in the disclosure of credit quality indicators by year of origination by only presenting the three most recent origination years (including the first year of adoption). In each subsequent fiscal year, the then-current origination year will be added in the periods after adoption until a total of five origination years are presented. Origination years before those that are presented separately shall be disclosed in the aggregate. For example, the phase-in approach would work as follows assuming a calendar year-end entity:

1. For the first annual reporting period ended December 31, 2X23, after the effective date of January 1, 2X23, an entity would disclose the end of period amortized cost basis of the current period originations within 2X23, as well as the two origination years of 2X22 and 2X21. The December 31, 2X23 end of period amortized cost balances for all prior originations would be presented separately in the aggregate.

2. For the second annual reporting period ended December 31, 2X24, after the effective date of January 1, 2X23, an entity would disclose the end of period amortized cost basis of the current period originations within 2X24, as well as the three origination years of 2X23, 2X22, and 2X21. The December 31, 2X24 ending amortized cost basis would be presented in the aggregate for all origination periods before the four years that are presented separately.

3. For the third annual reporting period ended December 31, 2X25, after the effective date of January 1, 2X23, an entity would disclose the end-of-period amortized cost basis of the current-period originations within 2X25, as well as the four origination years of 2X24, 2X23, 2X22, and 2X21. The December 31, 2X25 ending amortized cost basis would be presented in aggregate for all origination periods before the five years that are presented separately.

4. For interim-period disclosures within the years discussed above, the current year-to-date originations should be disclosed as the originations in the interim reporting period. . . .

As discussed in Section 8.2.2.1, only PBEs are required to provide the vintage disclosures in ASC 326-20-50-6. That is, only PBEs are required to present the amortized cost basis “by year of origination (that is, vintage year)” for each credit quality indicator. However, the FASB decided to provide transition relief to PBEs that are not within the scope of ASC 326-10-65-1(a) to make it less burdensome for such entities to adopt these vintage disclosure requirements. Specifically, ASC 326-10-65-1(h) requires PBEs that are not within the scope of ASC 326-10-65-1(a) to only (1) disclose credit quality indicators disaggregated for the previous three years and (2) add another year of information until they have provided disclosures for the previous five years.

Footnotes

Note that once an entity adopts ASU 2022-02, ASU 2019-11’s transition relief for TDRs will no longer be relevant.

9.3 SAB Topic 11.M Disclosure Requirements

The SEC staff has continued to emphasize the importance of providing investors with disclosures that explain the impact that new accounting standards are expected to have on an entity’s financial statements (“transition disclosures”).4 Such disclosures include information that investors may need to determine the effects of adopting a new standard and how the adoption will affect comparability from period to period. Transition disclosures should include not only an explanation of the transition method elected but also information about the impact that the credit losses standard is expected to have on an entity’s financial statements. The SEC staff has highlighted that, in the past, transparent disclosures about the anticipated effects of a new standard in multiple reporting periods preceding its adoption have prevented market participants from reacting adversely to significant accounting changes. In addition, the staff has indicated that it expects to see robust qualitative and quantitative disclosures about (1) the anticipated impact of new standards and (2) the status of management’s progress with implementation as the adoption date of the new standard approaches.

While much of the previous discussion of transition disclosures has focused on the adoption of the new revenue and leasing standards, the SEC staff has stated that similar considerations apply to the credit losses standard as well as other significant new accounting standards.

The SEC staff has also reiterated that a registrant should provide transparent transition disclosures that comply with the requirements of SAB Topic 11.M and has indicated that a registrant that is unable to reasonably estimate the quantitative impact of adopting the credit losses standard should consider providing additional qualitative disclosures about the significance of the impact on its financial statements.

Connecting the Dots

SAB 74 Disclosures — Footnotes or MD&A

Questions have arisen regarding whether an SEC registrant should provide SAB 74 disclosures in the financial statement footnotes or in its MD&A. On the basis of informal discussions with the SEC staff on this issue, we understand that the SEC would expect the following:

If material, the SAB 74 disclosures should be included in the financial statement disclosures (in addition to MD&A).
The determination of materiality would be based on specific facts and circumstances.
The disclosures in MD&A could have additional information that is not included in the financial statement footnotes. For example, if there is significant uncertainty regarding the impact of a new accounting standard, the MD&A may provide additional forward-looking statements and ranges that may not be replicated in the footnotes.

These views are supported by other SEC staff announcements, including those in the following guidance:

ASC 250-10-S99-6 states (emphasis added in bold):

The following is the text of SEC Staff Announcement: Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of a Registrant When Such Standards Are Adopted in a Future Period (in accordance with Staff Accounting Bulletin [SAB] Topic 11.M). [ASU 2017-03, paragraph 3]

This announcement applies to Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers (Topic 606); ASU No. 2016-02, Leases (Topic 842); and ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.FN1 [ASU 2017-03, paragraph 3]

SAB Topic 11.M provides the SEC staff view that a registrant should evaluate ASUs that have not yet been adopted to determine the appropriate financial statement disclosuresFN2 about the potential material effects of those ASUs on the financial statements when adopted. Consistent with Topic 11.M, if a registrant does not know or cannot reasonably estimate the impact that adoption of the ASUs referenced in this announcement is expected to have on the financial statements, then in addition to making a statement to that effect, that registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. In this regard, the SEC staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies that the registrant expects to apply, if determined, and a comparison to the registrant’s current accounting policies. Also, a registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. [ASU 2017-03, paragraph 3]

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FN1 This announcement also applies to any subsequent amendments to guidance in the ASUs that are issued prior to a registrant’s adoption of the aforementioned ASUs. [ASU 2017-03, paragraph 3]

FN2 Topic 11.M provides SEC staff views on disclosures that registrants should consider in both Management’s Discussion & Analysis (MD&A) and the notes to the financial statements. MD&A may contain cross references to these disclosures that appear within the notes to the financial statements.
SAB Topic 11.M, which states:

Facts: An accounting standard has been issued5 that does not require adoption until some future date. A registrant is required to include financial statements in filings with the Commission after the issuance of the standard but before it is adopted by the registrant.

Question 1: Does the staff believe that these filings should include disclosure of the impact that the recently issued accounting standard will have on the financial position and results of operations of the registrant when such standard is adopted in a future period?

Interpretive Response: Yes. The Commission addressed a similar issue and concluded that registrants should discuss the potential effects of adoption of recently issued accounting standards in registration statements and reports filed with the Commission.6 The staff believes that this disclosure guidance applies to all accounting standards which have been issued but not yet adopted by the registrant unless the impact on its financial position and results of operations is not expected to be material.7 MD&A8 requires registrants to provide information with respect to liquidity, capital resources and results of operations and such other information that the registrant believes to be necessary to understand its financial condition and results of operations. In addition, MD&A requires disclosure of presently known material changes, trends and uncertainties that have had or that the registrant reasonably expects will have a material impact on future sales, revenues or income from continuing operations. The staff believes that disclosure of impending accounting changes is necessary to inform the reader about expected impacts on financial information to be reported in the future and, therefore, should be disclosed in accordance with the existing MD&A requirements. With respect to financial statement disclosure, GAAS9 specifically address the need for the auditor to consider the adequacy of the disclosure of impending changes in accounting principles if (a) the financial statements have been prepared on the basis of accounting principles that were acceptable at the financial statement date but that will not be acceptable in the future and (b) the financial statements will be retrospectively adjusted in the future as a result of the change. The staff believes that recently issued accounting standards may constitute material matters and, therefore, disclosure in the financial statements should also be considered in situations where the change to the new accounting standard will be accounted for in financial statements of future periods, prospectively or with a cumulative catch-up adjustment.

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5 Some registrants may want to disclose the potential effects of proposed accounting standards not yet issued, (e.g., exposure drafts). Such disclosures, which generally are not required because the final standard may differ from the exposure draft, are not addressed by this SAB. See also FRR 26.

6 FRR 6, Section 2.

7 In those instances where a recently issued standard will impact the preparation of, but not materially affect, the financial statements, the registrant is encouraged to disclose that a standard has been issued and that its adoption will not have a material effect on its financial position or results of operations.

8 Item 303 of Regulation S-K.

9 See AU 9410.13–18.

Footnotes

See SAB Topic 11.M.