In May 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2019-05 which provides transition relief for entities adopting ASU 2016-13 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
ASU 2016-13 Financial Instruments — Credit Losses
Accounting Standards Update No. 2016-13 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments was issued in June 2016 and introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured on an amortized cost basis, replacing the previous incurred loss methodology. Update 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis.
The amendments affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures and reinsurance receivables.
For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. All entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
ASU 2019-05 Financial Instruments — Credit Losses — Targeted Transition Relief
Recent amendments in this ASU 2019-05 Financial Instruments — Credit Losses —Targeted Transition Relief provide targeted transition relief that is optional for, and will be available to, all reporting entities within the scope of Topic 326. The intention of these amendments is to increase comparability of financial statement information for some entities that otherwise would have measured similar financial instruments using different measurement methodologies.
ASU 2019-05 amends ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 Financial Instruments — Credit Losses — Measured at Amortized Cost if the instruments are eligible for the fair value option under ASC 825-10 Fair Value Measurement — Overall. The fair value option election does not apply to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis.
Effective Date and Transition Requirements
a) For entities that have already adopted the amendments in Update 2016-13
The amendments in ASU 2019-05 are effective for fiscal years beginning after December 15, 2019, including interim periods therein. An entity may early adopt the ASU in any interim period after its issuance if the entity has adopted ASU 2016-13. ASU 2019-05’s amendments should be applied “on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the statement of financial position as of the date that an entity adopted the amendments in ASU 2016-13.” Certain disclosures are required.
b) For entities that have not yet adopted the amendments in Update 2016-13
The effective date will be the same as the effective date in ASU 2016-13 (see above).
Sources: www.iasplus.com, ASU 2016-13, ASU 2019-05
The article is part of dReport – June 2019, Accounting news.