Thomson Reuters provides guidance on financial instruments impairment

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Thomson Reuters’ Checkpoint Catalyst research service has added guidance on the Financial Accounting Standards Board’s new impairment rules requiring companies to recognize estimated credit losses sooner.

The new Financial Instruments—Impairment topic in Checkpoint Catalyst discusses both the current expected credit loss model for financial assets measured at amortized cost along with targeted improvements to the existing impairment rules for available-for-sale debt securities.

FASB released its finalized credit loss standard in June 2016, making some of the most important changes in decades to the rules affecting entities that borrow and lend money. The new accounting standard applies to any entity that records receivables and investments, or is exposed to credit risk through guarantees, commitments, and off-balance-sheet financial instruments. The earliest effective date of Jan. 1, 2020 applies to calendar year-end companies that file periodic reports with the SEC. The standard differs in some significant ways from the approach in International Financial Reporting Standards to the treatment of credit losses despite convergence efforts between FASB and the International Accounting Standards Board.

“The new impairment model introduces a forward-looking component that will require high-levels of judgment and could present significant challenges for management and advisors,” said Salim Sunderji, managing director of Checkpoint, with the Tax & Accounting business of Thomson Reuters in a statement. “Implementation will require substantial work, and this new topic will help facilitate early preparation as entities and advisors face this major accounting change.”

The guidance discusses some of the most significant changes, requiring entities to recognize an allowance for expected credit losses at origination or acquisition and that public business entities will need to disclose credit quality information for assets by vintage (year of origination). It also covers how to use reasonable and supportable forecasts, select an estimation method, measure collateralized financial assets, and more. It also provides practice aids, including decision tools and calculators and many instructive charts and diagrams.

In conjunction with the new Checkpoint Catalyst topic, Thomson Reuters has also released a Checkpoint Catalyst: US GAAP special report, Financial Instruments—Impairment, which gives an overview of the new guidance, along with examples of balance sheet presentations and how to record an allowance for expected credit losses for beneficial interests.

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