FASB Proposes Certain Targeted Improvements to Credit Losses Standard
At its August 29, 2018, meeting, the FASB discussed whether certain targeted improvements to ASU 2016-131 should be made to reflect implementation issues discussed and recommendations that the Board’s credit losses transition resource group (TRG) made at its June 11, 2018, public meeting.2 Specifically, the FASB addressed the following topics at this week’s meeting:
- Topic 1 — Consideration of capitalized interest by using a method other than a discounted cash flow method under the current expected credit losses (CECL) model.
- Topic 2 — Refinancing and loan repayments.
- Topic 3 — Definition of “amortized cost basis” (i.e., including accrued interest in defining amortized cost basis).
- Topic 4 — Reversal of accrued interest on nonperforming financial assets.
- Topic 5 — Transfer of loans from held for sale to held for investment and transfer of credit-impaired debt securities from available for sale to held to maturity.
- Topic 6 — Accounting for recoveries under the CECL model.
The FASB tentatively decided that topics 1 and 2 do not necessitate changes to ASU 2016-13 because the TRG and the FASB staff clarified and summarized the guidance within the two issues in the TRG meeting minutes, which are publicly available on the FASB’s Web site. However, the Board tentatively decided to make Codification improvements to address topics 3 through 6, as follows:
Topic 3 — Definition of “Amortized Cost Basis” (i.e., Including Accrued Interest in Defining Amortized Cost Basis)
The FASB tentatively agreed to make improvements to ASU 2016-13 to allow for the following practical expedients with respect to the definition of amortized cost basis:
- Measurement — An entity “should be allowed to determine the expected cash flows for accrued interest separately from the associated financial asset and other components of amortized cost.”
- Presentation — An entity “should be able to continue presenting the accrued interest receivable [balance] separately on the balance sheet as long as the entity discloses the accrued interest receivable balance (and the applicable allowance for credit losses) and identifies the line item that includes accrued interest.”
- Disclosure — An entity would not need to trace “accrued interest amounts included in amortized cost to each origination year and by class of financing receivable in the vintage year.” Instead, it could disclose “the total amount of accrued interest included in amortized cost as a footnote [(or as a reconciling item)] to that vintage table.”
Topic 4 — Reversal of Accrued Interest on Nonperforming Financial Assets
The FASB tentatively agreed to make improvements to ASU 2016-13 to allow for the following accounting policy elections regarding the reversal of accrued interest on nonperforming assets:
- An entity could elect to reverse accrued interest amounts by adjusting (1) interest income or (2) the allowance for credit losses.
- An entity could elect to exclude from its expected credit loss calculations accrued interest receivables if the entity reverses or writes off the receivable balance in a timely manner.
Topic 5 — Transfer of Loans From Held for Sale (HFS) to Held for Investment (HFI) and Transfer of Credit-Impaired Debt Securities From Available for Sale (AFS) to Held to Maturity (HTM)
The FASB tentatively agreed to make improvements to ASU 2016-13 to clarify the following actions an entity would be required to perform when transferring a loan from HFS to HFI or a debt security from AFS to HTM:
- Reverse any previous valuation allowance or allowance for credit losses (excluding unrealized losses in accumulated other comprehensive income) balances.
- Apply the existing write-off guidance to all transfers (i.e., from HFS to HFI and from AFS to HTM).
- Present the effect of all transfers on a gross basis in the statement of earnings.
Topic 6 — Accounting for Recoveries Under the CECL Model
The FASB tentatively agreed to make improvements to ASU 2016-13 to clarify the accounting for recoveries as follows:
- The estimate of expected credit losses should include expected recoveries to be received from the borrower regardless of whether the estimate is measured on an individual or pool basis.
- An entity could present a negative allowance for credit losses as a result of including recoveries in the estimate of expected credit losses.
- An entity would not be permitted to include a negative allowance on a collateral-dependent financial asset as a result of including the portion of the fair value of the collateral, which exceeds the asset’s amortized cost basis. That is, the fair value of the collateral included in measuring the allowance for credit losses on a collateral-dependent financial asset would be limited to the asset’s amortized cost basis.
FASB Accounting Standards Update (ASU) No. 2016-13, Measurement of Credit Losses on Financial Instruments.
For more information on the June 11, 2018, credit losses TRG meeting, see Deloitte’s June 2018 TRG Snapshot.