FASB ASU 2016-13 goes into effect this year

Article | March 28, 2024 | Atchley & Associates LLP

FASB Accounting Standards Update (ASU) 2016-13, introduced a new Current Expected Credit Loss (CECL) model for financial assets. This new standard significantly changes how companies, particularly financial institutions, account for their credit loss reserves.

Here are some of the key changes in ASU 2016-13:

1. Current Expected Credit Loss Model: Previous standards required a "probable" threshold to be met before credit losses could be recognized. ASU 2016-13 replaces this with a forward-looking expected loss model, which requires businesses to estimate credit losses over the entire life of a financial asset.

2. Pooling of Assets: The new standard allows for the pooling of financial assets with similar risk characteristics, replacing the individual asset evaluation in the old model.

3. Enhanced Disclosures: ASU 2016-13 also requires more detailed disclosures, including information about how companies developed their credit loss estimates and the significant factors that influenced those estimates.

4. Scope Expansion: The new standard applies not only to loans but also to debt securities, trade receivables, lease receivables, reinsurance receivables, financial guarantees and any other financial assets not excluded from the scope that have the potential for credit losses.

5. Simplified Approach for Purchased Credit Deteriorated (PCD) Assets: ASU 2016-13 introduces a new approach for recognizing credit losses on purchased assets that have experienced significant credit deterioration since origination which is more comparable to how assets originated by organizations are accounted for. 

This new standard aims to provide financial statement users with more decision-useful information about the expected credit losses on financial assets held by a reporting entity at each reporting date. This is effective for private companies for fiscal years beginning after December 15, 2022.

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