The Financial Accounting Standards Board issued an Accounting Standards Update (ASU) that eases transition to the credit losses standard by providing the option to measure certain types of assets at fair value.
Issued in 2016, the credit losses standard introduced the expected credit losses method for measuring credit losses on financial assets measured at amortized cost, replacing the previous incurred loss method. It 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.
Some stakeholders — including auto financing institutions that extend credit to borrowers with limited or impaired credit histories—noted that certain financial statement preparers have begun (or are planning) to elect the fair value option on newly originated or purchased financial assets that have historically been measured at amortized cost. They noted that electing the fair value option would require them to maintain dual measurement methods — fair value measurements and amortized cost basis.
The new ASU allows an option for preparers to irrevocably elect the fair value option, on an instrument-by-instrument basis, for eligible financial assets measured at amortized cost basis upon adoption of the credit losses standard. This increases the comparability of financial statement information provided by institutions that otherwise would have reported similar financial instruments using different measurement methodologies, potentially decreasing costs for financial statement preparers while providing more useful information to investors and other users.
For institutions that have not yet adopted the credit losses standard, the new ASU will be effective when they implement the credit losses standard.
For institutions that have already adopted the credit losses standard, the new ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in any interim period after the issuance of the new ASU as long as an institution has adopted the credit losses standard.
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