The FASB recently issued proposed improvements, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. The proposed improvements are intended to clarify the appropriate application of the recently issued ASU 2016-13 regarding credit losses.

The FASB previously issued ASU 2016-13, which created Topic 326, regarding the reporting of credit losses on financial assets. This standard 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. This ASU becomes effective for public entities for fiscal years beginning after December 15, 2019 and for other entities for fiscal years beginning after December 31, 2020.

As issued in 2016, ASU 2016-13 was unclear 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, the FASB’s recently issued proposed improvements specify 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.

The proposed improvements also contain 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 potential effective date of the proposed improvements would generally align with the implementation date of ASU 2016-13 unless an entity has early adopted ASU 2016-13.

The full text of the Exposure Draft is available here.

^{Readers should not act upon information presented without individual professional consultation.}