FASB proposes tweaks to CECL standard

The Financial Accounting Standards proposed some minor adjustments Thursday to the credit losses standard, also known as CECL because of its use of a Current Expected Credit Losses model.

The proposed accounting standards update would address some of the issues raised by FASB’s constituents when they were providing feedback on the standard, which governs financial instruments such as loans that may become impaired, as many mortgages did during the financial crisis.

While applying the credit losses standard, some of FASB’s stakeholders questioned whether negative allowances were allowed on assets that had already shown credit deterioration at the time of purchase (also known as PCD assets). A negative allowance applies to a situation in which an organization recognizes a full or partial write-off of the amortized cost basis of a financial asset — but then later decides that the amount written off, or a portion of that amount, will in fact be recovered. In response to this question, the proposed accounting standards update would allow organizations to record negative allowances on PCD assets.

The proposed update also makes some other narrow technical improvements to the original standard. It would also reinforce some of FASB’s existing guidance forbidding organizations from recording negative allowances for available-for-sale debt securities.

FASB is asking for any additional feedback on the proposal to be submitted by July 29.

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