FASB proposes targeted relief upon adoption of the new credit loss standard

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In brief , PwC US Feb 07, 2019

Learn more about the proposal to allow the election of the fair value option upon adoption of the credit losses standard (CECL).

What happened?

On February 6, the FASB issued an exposure draft proposing an amendment to the transition guidance in the new credit losses standard, ASC 326, Financial Instruments - Credit Losses.

The proposed amendment would provide entities with an option, upon adoption of the standard, to irrevocably elect the fair value option for certain financial instruments that are both:

  • within the scope of ASC 326-20 (the current expected credit loss or “CECL” model) and
  • eligible for the fair value option in ASC 825-10, Financial Instruments—Overall.

This election would be applied on an instrument-by-instrument basis for eligible financial assets.

This fair value option election will not be applicable to debt securities classified as available-for-sale or held-to-maturity. In addition, the proposed amendment does not provide the option to discontinue or “unelect” the fair value option on instruments when an entity previously elected to apply it.

If the fair value option is elected, an entity would recognize the difference between the carrying amount and the fair value of the financial instrument as part of the cumulative effect adjustment associated with the adoption of ASC 326. Subsequently, the financial instrument would be measured at fair value with changes in fair value reported in current earnings.

The effective date for the proposed amendment would be consistent with the new credit losses standard. For entities that have already adopted the new standard, the FASB will determine the effective date based on stakeholder feedback.

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Why is this important?

Under the current guidance, the fair value option can only be elected for eligible instruments on specified election dates (for example, when an entity first recognizes a financial asset). The proposed relief would allow entities to elect the fair value option for existing eligible instruments upon adoption of the new credit losses standard.

What's next

Comments on the exposure draft are due by March 8, 2019.

To have a deeper discussion, contact:

Chip Currie

Partner, National Professional Services Group, PwC US

Email

Seth Drucker

Partner, National Professional Services Group, PwC US

Email

Joscelyn Carlin

Director, National Professional Services Group, PwC US

Email

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David Schmid

IFRS & US Standard Setting Leader, National Professional Services Group, PwC US

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