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