by David Brown, Jennifer DeSanctis, Jon Howard, Michelle Leon, Marla Lewis, and Stephen McKinney,
Deloitte & Touche LLP
In June 2016, the FASB issued ASU 2016-13,1 which adds to U.S. GAAP an impairment model —
known as the current expected credit losses (CECL) model — that is based on expected losses
rather than incurred losses. Once effective, the new guidance will significantly change the
accounting for credit impairment under ASC 326.2 See Deloitte’s June 17, 2016, Heads Up for
more information about the new guidance.
This TRG Snapshot summarizes the November 1, 2018, public meeting of the FASB’s credit
losses transition resource group (TRG), which was the third such meeting attended by the
FASB since it issued the CECL guidance. See Deloitte’s June 2017 TRG Snapshot and June 2018
TRG Snapshot for summaries of the public TRG meetings held on June 12, 2017, and June 11,
The purpose of the credit losses TRG is similar to that of the TRG established by the FASB and
International Accounting Standards Board (IASB®) to discuss their joint revenue recognition
standard. That is, the TRG does not issue guidance but provides feedback on potential issues
related to the implementation of the CECL model. By analyzing and discussing potential
implementation issues, the TRG helps the FASB determine whether it needs to clarify or issue additional guidance. The TRG comprises financial statement preparers, auditors, and users.
Board members of the FASB also attend the TRG’s meetings. In addition, representatives from
the SEC, PCAOB, Federal Reserve, Office of the Comptroller of the Currency, FDIC, National
Credit Union Administration, and Federal Housing Finance Agency are invited to observe the
The following topics were discussed at the November 1, 2018, meeting and are summarized
Topic 1 — Contractual term: extensions and measurement inputs.
Topic 2 — Vintage disclosures for revolving loans.
The appendix of this publication discusses other matters submitted to the credit losses TRG
and recent technical inquiries submitted to the FASB staff related to ASU 2016-13.
Before the TRG began discussing topics at the November 1, 2018, meeting, FASB Board
Member Hal Schroeder indicated that the FASB is expected to receive a document drafted by
various financial institutions that proposes an alternative to the CECL model. Mr. Schroeder
provided a high-level description of the proposal, stating that it would require an entity to
estimate an allowance for expected credit losses in the same manner it would do so under
the CECL model. However, the entity would recognize in its income statement only the
credit losses expected to occur in the 12 months after the reporting date. The entity would
recognize in accumulated other comprehensive income the remaining expected credit losses
estimated under the CECL model.
Mr. Schroeder stated that the FASB had considered this type of approach to estimating and
recognizing expected credit losses during the development of ASU 2016-13 but ultimately
rejected it after performing a cost-benefit analysis. However, Mr. Schroeder indicated that the
FASB would consider the proposal at a future public board meeting.
Topic 1 — Contractual Term: Extensions and Measurement Inputs
Background: The TRG discussed the following two questions that have been raised by
stakeholders regarding the contractual term:
Question 1 — Is it appropriate for an entity to consider expected extensions in
determining the contractual term when estimating expected credit losses in
accordance with ASC 326-20?
Question 2 — Is an entity precluded from considering future economic and other
conditions (referred to as “measurement inputs”) beyond the contractual term of a
financial asset for short-term lending arrangements under ASC 326-20?
ASC 326-20-30-6 requires entities to estimate expected credit losses over the contractual
term of the financial asset. The guidance does not define contractual term; however, it
specifies certain elements that should be considered in the determination of the contractual
term. ASC 326-20-30-6 states, in part:
An entity shall consider prepayments as a separate input in the method or prepayments may be
embedded in the credit loss information in accordance with paragraph 326-20-30-5. An entity shall
consider estimated prepayments in the future principal and interest cash flows when utilizing a
method in accordance with paragraph 326-20-30-4. An entity shall not extend the contractual term
for expected extensions, renewals, and modifications unless it has a reasonable expectation at the
reporting date that it will execute a troubled debt restructuring with the borrower.
ASC 326-20-30-6 indicates that entities must consider prepayments but cannot consider
expected extensions except in limited circumstances. However, stakeholders believe that in
certain circumstances, the consideration of extensions in the determination of the contractual
term aligns with the overall objective of ASC 326. As outlined in TRG Memo 15, stakeholders
questioned how an entity should determine the contractual term of a financial asset in the
Scenario A — The arrangement does not contain an explicit extension option; however,
the lender may have a history of renewing or extending the term of the loan.
Scenario B — The arrangement contains a contractual extension option that gives the
borrower the unilateral ability to extend the arrangement’s term.
Scenario C — The arrangement contains a contractual extension option that gives the
borrower the conditional ability to extend the term. Satisfying the condition may or
may not be within the borrower’s control.
Scenario D — The arrangement contains a contractual extension option that is solely
within the lender’s control.
The FASB staff believes that the contractual term of the arrangements in Scenario B would
include the extension options described because in that scenario, the ability to exercise
the extension options are outside the lender’s control. As a result, the lender has a present
obligation to extend credit. By contrast, the staff believes that the contractual term of the
arrangements in Scenarios A and D would not be affected by a history of renewing or
extending an arrangement or an extension option that is solely in the control of the lender.
In both of those scenarios, the lender has the ability to limit its current obligation to extend
credit. The FASB staff sought feedback from the TRG members regarding Scenario C.
Summary: The TRG members agreed with the FASB staff’s views regarding Scenarios A,
B, and D. Concluding that Scenarios B and C were similar, they reached a consensus that
the contractual term of an arrangement would include the extension options described in
Scenario C. However, certain members expressed concerns that Scenario C might present
operational challenges related to an entity’s estimation of the probability that the specified
condition would be met and the borrower would extend the arrangement. As a result, the
TRG indicated that an entity could use the following methods to determine which extension
options to include in the contractual term:
Method 1 — Assume that the extension will be exercised and consider prepayments
when estimating expected credit losses.
Method 2— Estimate the probability of an extension.
Question 2 addresses whether a lender should consider information beyond the contractual
term of a loan when estimating expected credit losses. TRG Memo 15 provides an example
related to a one-year construction loan made to an entity that is working on a real estate
development that is expected to take three years to complete. Upon the loan’s maturity, the
borrower agrees to do one of the following:
Pay off the loan by refinancing it with the current lender.
Pay off the loan by refinancing it with another lender.
Pay off the loan with funds generated by the project.
Sell the underlying development and use the funds to pay off the loan.
Default on the loan and allow the lender to foreclose on the underlying collateral.
The TRG discussed the following views regarding whether and, if so, how an entity should
consider information beyond the contractual term of a financial asset:
View A — Consider only the probability that the borrower will default within the
contractual term of the loan.
View B — Consider the probability that the borrower will default throughout the life
of the project (for instance, in this example, consider the three years even though the
loan matures in one year).
View C — Consider only the probability that the borrower will default beyond the
loan’s contractual term relative to the probability that the borrower will refinance with
Summary: Although TRG Memo 15 presented Question 2 within the context of the example
in TRG Memo 15 and Views A through C outlined above, the discussion broadly referred to
whether an entity’s consideration of information must be limited to the contractual term
as determined under Question 1. The staff believes that ASC 326-20-30-7, which states the
following, does not limit measurement inputs to the contractual term of the financial asset:
When developing an estimate of expected credit losses on financial asset(s), an entity shall consider
available information relevant to assessing the collectibility of cash flows. This information may
include internal information, external information, or a combination of both relating to past events,
current conditions, and reasonable and supportable forecasts. An entity shall consider relevant
qualitative and quantitative factors that relate to the environment in which the entity operates and
are specific to the borrower(s). When financial assets are evaluated on a collective or individual
basis, an entity is not required to search all possible information that is not reasonably available
without undue cost and effort. Furthermore, an entity is not required to develop a hypothetical pool
of financial assets. An entity may find that using its internal information is sufficient in determining
TRG members generally agreed that an entity’s consideration of measurement inputs should
not be limited to the contractual term of the asset.
Topic 2 — Vintage Disclosures for Revolving Loans
Background: ASC 326-20-50 requires entities to disclose credit quality information regarding
their financial instruments. That is, ASC 326-20-50-6 requires an entity to present the
amortized cost basis within each credit quality indicator by year of origination. However,
ASC 326 specifically exempts “funded or unfunded amounts of line-of-credit arrangements,
such as credit cards” from that requirement because the timing of the underwriting decisions
related to those arrangements may not align with the borrower’s use of funds. Instead, entities
may aggregate such revolving loan balances and report them in a separate single column,
without regard to when the initial underwriting decisions were made.
However, for loans that are modified, ASC 326-20-50-7 requires an entity to apply the
guidance in ASC 310-20 to determine whether the loan would be considered new. If a
modified loan would be considered a new loan, an entity would report the loan as a currentyear
origination in the year of the restructuring to comply with the vintage disclosure
requirements in ASC 326-20-50-6. However, stakeholders have questioned how an entity
would present, in its vintage disclosures, revolving loans that convert to term loans.
TRG Memo 16 discusses the implementation question raised by stakeholders regarding the
vintage disclosure requirements for revolving arrangements that later convert to term loans.
Summary: The TRG discussed the following views related to this question:
View A — The loans should always be included in the revolving loan totals, even after
conversion to a term loan.
View B — The loans should be presented in the vintage year that corresponds with the
start date of the term loan (the conversion date).
View C — The loans should be presented in the vintage year that corresponds with the
origination date of the original revolving credit agreement.
View D — Lenders should make and disclose a policy election by class of receivable
and apply View A, B, or C.
View E — Term loans should be presented in the vintage year that corresponds with
the lender’s most recent credit decision.
The FASB staff dismissed View A because of its belief that it (1) would not provide financial
statement users with decision-useful information and (2) could be misleading if these loans
were still presented as revolving arrangements after they had been converted to term loans.
The staff also emphasized that the Board intended to align the guidance in ASU 2016-13 with
the underwriting decisions made by an entity, as described further in paragraph BC11 of that
ASU. The FASB staff asked TRG members to discuss the views and determine which of them
they support (other than View A).
At the TRG meeting, members discussed the above views and offered a new option, View
F, under which an entity would be required to present an additional column in the vintage
disclosure table that would include loans that were converted from revolving loans to term
TRG members generally agreed that a “hybrid” approach that combined Views E and F would
be appropriate. That is, if an entity made a new credit decision and considered the loan to be
a “new loan” under ASC 310-20-35-9 as a result of a related modification, the entity should
reflect the loan in the origination year it made the credit decision when converting it from a
revolving loan to a term loan. However, if the conversion from a revolving to a term loan was
contractually specified in the original loan, or if, as a result of the conversion, the loan was
not considered a “new loan” (e.g., it was a troubled debt restructuring), the loan should be
reflected in a new column that shows loans that were converted from revolving to term loans.
In addition, TRG members suggested that the Board consider whether the scope of the hybrid
view should be expanded to include all instruments that are subject to ASU 2016-13 and for
which a revised credit decision is made.
Topic 3 — Recoveries
Background: At the June 2018 TRG meeting, the FASB staff stated its belief that the Board’s
intention when developing the CECL model was for companies to estimate and include
expected financial asset recoveries in the CECL calculation because they represent “amount[s]
expected to be collected.” After the June 2018 TRG meeting, the staff received feedback from
several stakeholders that entities were interpreting the term “recoveries” differently.
On the basis of that feedback, the staff described in TRG Memo 17 two possible alternatives
on how to clarify the guidance:
Alternative 1 — “Allow for All Types of Recoveries to Be Considered Except Sales of
Performing Financial Assets . . . This alternative would have to amend the guidance to
limit recoveries to only those amounts expected to be received on nonperforming
Alternative 2 — “Allow for All Types of Recoveries to Be Considered . . . [N]o further
amendments are recommended for Update 2016-13.”
Summary: TRG members discussed the two alternatives at length but did not select either
of them. They generally agreed that recoveries should include cash flows from borrowers
(i.e., principal and interest), collateral, or the sale proceeds of a financial asset to a third party.
A substantial portion of the discussion was devoted to recoveries, and some TRG members
suggested that the FASB amend ASU 2016-13 to provide more guidance on the definition of a
recovery. The FASB staff will continue to evaluate the two alternatives and will incorporate any
amendments to the guidance in a future proposed ASU.
In addition to considering whether and, if so, how to clarify the guidance on recoveries, the
FASB staff discussed whether an entity should be permitted to record a negative allowance
when measuring the expected credit losses for financial asset(s) subject to a cap. The cap
would preclude entities from recording an amount that exceeds the aggregate sum of
previous write-offs of the financial asset. The TRG generally agreed with the staff’s views on
a negative allowance. The staff indicated that the guidance in ASC 326 would need to be
amended to indicate that a negative allowance is permitted.
>Other TRG Submissions
In addition to the three topics discussed above, the FASB staff received from stakeholders
the three TRG submissions outlined below. As indicated in TRG Memo 14, these submissions
are not addressed in separate TRG memos because “(a) the [FASB] staff believes the current
guidance is clear and no amendments are needed or (b) the submission is beyond the scope
of the TRG.”
>>Discounting Inputs When Using a Method Other Than a DCF
Stakeholders questioned “whether discounting certain inputs in estimating credit losses
would be permitted when an entity uses a method other than a [discounted cash flow (DCF)]
method, such as a probability-of-default credit loss method. These stakeholders questioned
whether discounting certain inputs to a date other than the reporting date also would be
The FASB staff stated that it “believes the guidance is clear that if an entity were to discount
cash flows or inputs used to measure the allowance for credit losses, the effect of discounting
would have to be measured as of the reporting date, not an arbitrary default date.”
Furthermore, the staff expressed its belief that:
[P]artial discounting would not provide users with decision-useful information, as it would create
additional complexity in understanding the accounting model. In addition, it would not be possible
for the staff to determine which inputs should or should not be discounted because the guidance
does not provide specificity on which inputs should be considered when measuring the allowance
for credit losses. . . . For these reasons, the staff believes partial discounting is prohibited and
believes that if an entity wants to discount the inputs used to measure the allowance for credit
losses, the entity should discount all the inputs used in the measurement.
TRG members discussed the discounting of inputs in the estimation of credit losses in
situations in which a method other than a DCF method is used. Many TRG members
expressed the view that discounting certain inputs, specifically recoveries, is better than other
methods for reflecting the overall estimated credit losses. However, some TRG members
indicated that if a method other than a DCF method is used to estimate credit losses, an entity
should be precluded from discounting any inputs. The TRG generally agreed that the guidance
is not clear and asked the FASB staff to explain whether an entity would be permitted to
discount inputs in estimating credit losses when it uses a method other than a DCF method.
>>Accounting for Changes in Foreign Exchange Rates for Foreign-Currency-
Denominated Available-for-Sale Debt Securities
Stakeholders questioned “the timing of when unrealized losses related to changes in foreign
exchange rates from an investment in a foreign-currency-denominated available-for-sale
(AFS) debt security should be recognized in earnings.” The FASB staff acknowledged concerns
raised by stakeholders that the amendments in ASU 2016-13 will delay loss recognition since
unrealized losses related to foreign exchange rates are reported in other comprehensive
income and recognized in earnings “(a) at the maturity of the security, (b) upon the sale of the
security, (c) when an entity intends to sell, or (d) when an entity is more likely than not required
to sell the security before recovery of its amortize cost basis.” However, the staff noted that:
[T]he guidance is clear that unrealized losses related to changes in foreign exchange rates from an
investment in a foreign currency denominated AFS debt security reported in OCI are recognized
in earnings (a) at the maturity of the security, (b) upon the sale of the security, (c) when an entity
intends to sell, or (d) when an entity is more likely than not required to sell the security before
recovery of its amortize cost basis.
Furthermore, the FASB staff stated “that this topic is beyond the scope of the Credit Losses
TRG because the topic relates to reporting changes in fair value related to foreign exchange
TRG members agreed with the FASB staff that this topic is beyond the TRG’s scope; however,
they asked the FASB staff to clarify the mechanics of the relationship between ASC 830 and
ASC 450 regarding the timing of unrealized losses related to changes in foreign exchange
rates from an investment in a foreign-currency-denominated AFS debt security.
>>Beneficial Interest Classified as Trading
Stakeholders questioned “whether an entity should maintain an allowance for credit losses
for a beneficial interest in the scope of Subtopic 325-40 that is classified as trading.” The FASB
staff responded that “the scope of Subtopic 326-20 clearly excludes financial assets measured
at fair value through net income. Therefore, the [FASB] staff believes the guidance is clear
that an entity is not required to maintain an allowance for credit losses for beneficial interest
classified as trading.”
In addition, FASB staff acknowledged that:
[ASU] 2016-13 does not include specific guidance for determining the subsequent measurement of
the accretable yield for beneficial interests classified as trading similar to the guidance for HTM and
AFS beneficial interests as noted in [ASC 325-40]. However, the [FASB] believes that the guidance on
recognition of interest income for beneficial interests in the scope of Subtopic 325-40 classified as
trading is beyond the scope of the TRG. The staff believes that entities will need to apply reasonable
judgment in determining the amount of accretable yield for beneficial interests classified as trading.
The FASB staff does not intend to continue working on this issue.
>Recent Technical Inquiry (Related to ASU 2016-13)
In TRG Memo 14, the FASB staff discusses a recent technical inquiry (and outcome) regarding
credit quality disclosures, noting that ASU 2016-13 requires “public business entities to
disclose in the footnotes to the financial statements the amortized cost basis of financial
assets by class of financing receivable or major security type, credit quality indicator, and year
of origination to meet the disclosure objective in paragraph 326-20-50-4.”
A stakeholder asked the FASB staff whether gross write-offs and recoveries must be “included
in the credit quality disclosure, similar to Example 15, because the requirement is not dictated
by the guidance contained within paragraphs 326-20-50-5 through 50-6.” The FASB staff
responded that it believes that “the Board intended to include these amounts to comply with
the disclosure requirements . . . in paragraphs 326-20-50-5 and 50-6.”
The TRG stated that the examples in ASC 326-20 are not authoritative and recommended that
the FASB amend the guidance in ASU 2016-13 to require an entity to disclose gross write-offs
and recoveries. The FASB staff intends to make improvements to ASC 360-20 to address the
concerns raised by the TRG.
FASB Accounting Standards Update (ASU) No. 2016-13, Measurement of Credit Losses on Financial Instruments.
For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB
Accounting Standards Codification.” ASC 326 represents a new ASC Topic that includes both legacy impairment guidance moved
from other ASC paragraphs as well as new credit losses guidance introduced by ASU 2016-13. Some of the guidance moved from
other ASC paragraphs was also amended by ASU 2016-13.