The American Institute of CPAs’ Financial Reporting Executive Committee, also known as FinREC, has posted a pair of working drafts on how accountants can deal with two issues related to the Current Expected Credit Loss standard that will be taking effect at the end of next year.
FinREC issued drafts of two issue papers on Zero Expected Credit Losses and the Reversion Method: Estimation vs. Accounting Policy and is asking for comments on them.
The Financial Accounting Standards Board’s CECL standard will change how financial institutions account for expected credit losses on items such as impaired loans and could be the most significant accounting change for financial institutions in decades. It affects the allowance for credit loss reserves and requires more forward-looking information to be considered when developing an estimate for them. The working drafts discuss some of the considerations for depository and lending institutions, along with insurance companies.
The standard takes effect for public companies in December 2019 and for private companies a year later. It will mostly affect the financial statements of banks, credit unions and other financial institutions that offer credit and loans, but it can also have an impact on other types of companies that deal with them. FASB’s model of how to account for expected credit losses under U.S. GAAP differs in some ways from the International Accounting Standards Board’s version of the financial instruments standard for International Financial Reporting Standards despite years of work on converging the two sets of standards.
The AICPA guidance deals with FASB’s version of the standard. The document on zero expected credit losses notes that FASB’s standard says that no measure of expected credit losses is required for a financial asset or group of financial assets if the historical credit loss information, adjusted for current conditions and reasonable and supportable forecasts, results in an expectation of nonpayment of the amortized cost basis of zero.
The document on the reversion method points out that the CECL standard says an entity can revert to historical loss information after the forecast period at the input level or based on the entire estimate. It can do that using either immediate reversion, a straight-line basis, or another rational, systematic basis. However, questions have come up about how an entity should distinguish between an accounting policy election, an estimation technique or an accounting policy election that’s inseparable from an estimation technique as it evaluates its selection.
Feedback on the working drafts should be submitted to FinREC by Oct. 10, 2018. The final issues will be included in a new AICPA Allowance for Credit Losses A&A Guide (with a focus on lending institutions and insurance companies). The AICPA used a similar process in producing an implementation guide for various industry issues arising from the revenue recognition standard.