The FASB has issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. The FASB previously issued ASU 2016-13, which created Topic 326 regarding the reporting of credit losses on financial assets. ASU 2016-13 requires an estimated allowance for credit losses to be reported in a separate valuation account that for purchased financial assets is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected. ASU 2016-13 becomes effective for public entities that meet the definition of an SEC filer, excluding smaller reporting companies, for fiscal years beginning after December 15, 2019. For all other entities, ASU 2016-13 becomes effective for fiscal years beginning after December 15, 2022.

ASU 2016-13 was unclear on how to account for any expected recoveries of amounts previously written off from the amortized cost basis of purchased financial assets with credit deterioration. In response to this concern regarding the transition to ASU 2016-13, ASU 2019-11 specifies that any expected recoveries of the amortized cost basis previously written off should be included in the allowance for credit losses as a negative amount.

ASU 2019-11 also contains several other clarifications including transition relief related to the calculation of the effective interest rate on existing troubled debt restructurings as well as disclosure relief related to accrued interest receivable amounts included in the amortized cost basis of financial instruments.

The effective date of ASU 2019-11 will generally align with the implementation date of ASU 2016-13 unless an entity has early adopted ASU 2016-13.

The full text of the ASU is available here.

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