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Transition relief to CECL guidance allows fair value option

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Pen pointed on charts and graphs The FASB recently issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief, allowing entities to irrevocably elect to measure financial instruments at fair value on a recurring basis in accordance with the fair value option in ASC 825-10 upon adoption of the expected credit loss guidance in ASC 326.

Under the amendments, entities may elect to measure financial instruments measured at amortized cost at fair value on a recurring, instrument-by-instrument basis if the financial instruments are within the scope of ASC 326-20 and are eligible to be measured at fair value under ASC 825-10. For example, an entity may not elect the fair value option for a net investment in a lease, even though this type of financial asset is within the scope of ASC 326, because the net investment in a lease is not eligible for the fair value option in ASC 825-10.

However, held-to-maturity debt securities are excluded from the scope of the amendments in ASU 2019-05.

Transition The guidance in ASU 2019-05 requires entities to report the difference between the carrying amount and the fair value of the financial instrument as of the date when they adopt the expected credit loss guidance (that is, the beginning of the fiscal year of adoption) as an adjustment to the opening balance of retained earnings. Such differences include, but are not limited to, the following items:

  • Unamortized deferred costs, fees, premiums and discounts
  • Valuation allowances (for example, allowance for loan losses)
  • Accrued interest

Effective date Entities that have not yet adopted the expected credit loss guidance should apply the amendments in ASU 2019-05 concurrent with the adoption of the expected credit loss guidance in ASC 326.

Entities that have already adopted the expected credit loss guidance in ASC 326 should apply the amendments in ASU 2019-05 in fiscal years beginning after Dec. 15, 2019, including interim periods within those fiscal years. Such entities may early-adopt the amendments in ASU 2019-05, including adoption in an interim period.

Contacts:

Rahul GuptaRahul Gupta
Partner
Accounting Principles Group
T +1 312 602 8084


Graham DyerRyan Brady
Partner
Accounting Principles Group
T +1 312 602 8741


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