FASB Proposes Amendments to Current Expected Credit Losses Standard
At its July 25, 2018, meeting, the FASB voted to draft an Accounting Standards Update (ASU) to clarify certain aspects of ASU 2016-13,1 specifically (1) the transition and effective date for nonpublic business entities (non-PBEs) and (2) the applicability of ASC 3262 to operating lease receivables. The proposed amendments are a result of discussions held at the FASB’s credit losses transition resource group (TRG) meeting on June 11, 2018.3 The proposed ASU will have a 30-day comment period when released.
In June 2016, the FASB issued ASU 2016-13, 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 guidance4 will significantly change the accounting for credit impairment under ASC 326.
Transition and Effective Date for Non-PBEs
ASC 326 provides staggered effective dates for preparers of financial statements; however, the ASU is effective for both (1) PBEs that do not meet the U.S. GAAP definition of an SEC filer and (2) non-PBEs for fiscal years beginning after December 15, 2020. Further, for most debt instruments, entities must record a cumulative-effective 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).
Consequently, stakeholders raised concerns, through submissions to the TRG, that the effective date of ASU 2016-13 and transition effectively eliminate the benefit of providing non-PBEs with an additional year before implementing the guidance, which is inconsistent with the FASB’s original intent.
The Board voted to amend the effective date for non-PBEs to fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.
Connecting the Dots
ASU 2016-13 is currently effective for interim periods within fiscal years beginning after December 15, 2021; therefore, the proposed alternative does not change the effective date for interim periods of non-PBEs.
Billed Operating Lease Receivables
As described in further detail in the June 2018 TRG Snapshot, and as a result of a stakeholder’s concerns, the TRG discussed at its meeting “whether billed operating lease receivables are within the scope of Subtopic 326-20.”
In response to this inquiry, the FASB staff stated its belief that “operating lease receivables are not within the scope of Subtopic 326-20” and that “it was never the Board’s intent to include operating leases within the scope.” Therefore, an entity would apply ASC 8425 rather than ASC 326-20 to account for changes in the collectibility assessment for operating leases. When applying ASC 842, an entity would recognize changes in the collectibility assessment for an operating lease as an adjustment to lease income.
At the TRG meeting, its members (1) generally supported the view that operating leases should be excluded from the scope of ASC 326-20 and (2) encouraged the FASB staff to amend ASC 326-20 to clarify whether operating lease receivables are included in or excluded from its scope.
The Board voted to amend ASC 326-20 to clarify that operating lease receivables are not within the scope of ASC 326-20. Accordingly, as noted above, an entity would assess collectibility of operating lease receivables in accordance with ASC 842.
Footnotes
1
FASB Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments.
2
FASB Accounting Standards Codification (ASC) Topic 326, Financial Instruments — Credit Losses.
3
See Deloitte’s June 2018 TRG Snapshot for more information about the June 2018 meeting.
5
FASB Accounting Standards Codification (ASC) Topic 842, Leases.