On June 16, 2016, the Financial Accounting Standards Board (FASB) issued a standards update on financial instrument credit losses.
Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses, part of the convergence project on financial instruments that it has been working on with the International Accounting Standards Board (IASB) for eight years. The standard will be testable on the CPA Examination in January 2020.
The ASU requires banks and other lending institutions to immediately record the full amount of credit losses expected in their loan portfolios, thus improving financial reporting by requiring timelier recording of credit losses on loans, and by providing investors with better and more timely information about those losses. (Note that the scope of ASU 2016-13 is all financial assets that are accounted for at amortized cost, affecting more types of companies than just banks, credit unions and financial firms.)
Specifically, the ASU:
- Requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts, using forward-looking information to better determine their credit loss estimates.
- Requires enhanced qualitative and quantitative disclosures to aid investors and other financial statement users in better understanding the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio.
- Amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.
The FASB’s credit loss standard differs in significant ways from that of the International Accounting Standards Board (IASB), which issued a single financial instruments standard under International Financial Reporting Standard (IFRS) 9 in July 2014. The FASB broke the project into separate accounting standards updates for U.S. GAAP:
- ASU 2016-01, Financial Instruments—Overall, (addressing the recognition and measurement of financial instruments) was issued in January 2016.
- ASU 2016-13, Financial Instruments—Credit Losses, (addressing the measurement of credit losses on financial instruments) was issued in June 2016.
- An exposure draft on the final major component, hedging, is expected to be released in August or September of 2016.
To assist with the implementation of ASU 2013-13, the FASB has assembled a Transition Resource Group (TRG). Unlike the joint TRG that was established to help with implementation of the converged revenue recognition standard, the IASB will not be involved because the two sets of standards are significantly different. For additional information, the FASB has posted a FASB in Focus overview and a video on its website, www.FASB.org.
ASU 2016-13 will take effect for SEC filers for fiscal years beginning after December 15, 2019. For public companies that are not SEC filers, and for all other organizations, the ASU will take effect for fiscal years beginning after December 15, 2020. Since accounting pronouncements are eligible to be tested on the CPA Examination in the later of (1) the first testing window beginning after the pronouncement’s earliest mandatory effective date or (2) the first testing window beginning six months after the pronouncement’s issuance date, ASU 2016-13 will become testable in January 2020.
It’s important to be aware of issuances that could impact how you answer the questions on the CPA Exam within that topic. Since exam material could conceivably change from one exam testing window to another, turn to Surgent for the latest updates. Our CPA Review team stays informed of all authoritative and pronouncement changes and ensures you’ll receive the news as soon as we do!
