Current Expected Credit Losses

As noted above, the CECL model is consistently applied to recognize and measure credit losses related to financial assets measured at amortized cost, net investments in leases, reinsurance recoverables, and certain off-balance-sheet credit exposures; the credit impairment model for AFS debt securities is separate. Assets measured at fair value (e.g., trading securities) or under lower-of-cost-or-market models (e.g., mortgage loans held for sale) are not subject to separate credit loss guidance since credit losses are reflected in the measurement models that apply to such assets.

The CECL model does not specify a threshold for recognizing an impairment allowance. Rather, an entity recognizes its estimate of expected credit losses for financial assets as of the end of the reporting period. Credit impairment is recognized as an allowance — or contra-asset — rather than as a direct write-down of the amortized cost basis of a financial asset.

The CECL model reflects management’s expectations regarding the net amounts expected to be collected on a financial asset. Because entities manage credit risk differently, they have flexibility when reporting those expectations under ASC 326. As a result, ASC 326 does not require entities to use a specific method when measuring their estimate of expected credit losses. Accordingly, an entity can select from a number of measurement approaches to determine the allowance for expected credit losses. Some approaches project future principal and interest cash flows (i.e., a discounted cash flow [DCF] method), while others project only future principal losses. ASC 326 emphasizes that an entity should use methods that are “practical and relevant” given the specific facts and circumstances and that “[t]he method(s) used to estimate expected credit losses may vary on the basis of the type of financial asset, the entity’s ability to predict the timing of cash flows, and the information available to the entity.”