FASB offers fair value option to ease CECL transition

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The Financial Accounting Standards Board is giving banks and other financial institutions some leeway in applying the new credit losses standard by offering them an option to measure some kinds of assets at fair value.

FASB released an accounting standards update Wednesday aimed at simplifying the transition to the credit losses standard, also known as CECL because it uses a current expected credit loss model.

FASB issued the credit losses standard in 2016 as part of its financial instruments convergence project with the International Accounting Standards Board, although the two boards eventually went separate ways in the way they decided to measure credit losses. FASB used an expected credit losses method for measuring credit losses on financial assets measured at amortized cost, replacing the previous incurred loss method. It also modified the accounting for available-for-sale debt securities, which needs to be individually assessed for credit losses when fair value is less than the amortized cost basis.

However, FASB heard complaints from some of its constituents, such as auto-financing providers who extend credit to borrowers with limited or impaired credit histories. They pointed out that some financial statement preparers have started (or are planning) to elect the fair value option on newly originated or purchased financial assets that have historically been measured at amortized cost. They told FASB that electing the fair value option would mean they would have to keep using two different measurement methods—fair value measurements and amortized cost basis.

The new accounting standards update provides an option for preparers to irrevocably elect the fair value option, on an instrument-by-instrument basis, for eligible financial assets measured at amortized cost basis upon adoption of the credit losses standard. FASB believes this will increase the comparability of financial statement information offered by institutions that otherwise would have reported similar financial instruments using different measurement methodologies. The update potentially reduce costs for financial statement preparers while giving more useful information to investors and other users.

For financial institutions that haven’t yet adopted the credit losses standard, the new update will take effect when they implement the credit losses standard.

For institutions that have already adopted the standard, the new update will take effect for fiscal years starting after Dec. 15, 2019, including interim periods within those fiscal years. Early adoption is allowed within any interim period after the accounting standards update has been issued, as long as an institution has adopted the credit losses standard.

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