Multiple clarifications are in the works for three of the Financial Accounting Standards Board’s (“FASB”) top accounting standards. On November 19, the FASB issued a proposal featuring changes to the following Accounting Standards Updates (“ASU”):
ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
The proposal features 11 changes to the credit loss standard. The proposed clarifications include how companies calculate the allowance for credit losses on accrued interest receivable balances and accounting for the allowance when moving debt securities between measurement categories. Also proposed are clarifications regarding when a company must include recoveries when calculating future loan losses, as well as how a company:
- determines the effective interest rate for variable rate loans;
- modifies the effective interest rate for prepayment expectations; and
- considers the expenses to sell when foreclosure becomes likely.
In addition, the FASB proposes clarifications that reinsurance receivables fall under the scope of FASB Accounting Standards Codification (“ASC”) 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. The FASB also proposed fixing a slight reference error under Paragraph FASB ASC 310-40-55-14, Receivables — Troubled Debt Restructurings by Creditors — Implementation Guidance and Illustrations — Example 2: Fair Value Less Cost to Sell Less Than the Seller’s Net Receivable, and updating a cross-reference in the equity method losses guidance.
Other clarifications proposed are how companies should disclose line-of-credit arrangements that become term loans, and how companies consider extension and renewal opportunities when deciding a financial asset’s contractual term.
ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
The proposal features eight changes to the hedge accounting standard. The proposed clarifications include how companies should handle:
- the partial-term fair value hedges of interest rate risk and foreign exchange risk;
- the amortization and disclosure of fair value hedge basis changes; and
- the hedged contractually specified interest rate under the hypothetical derivative method.
The FASB also proposes clarifying transition provisions and two narrow application questions for nonprofits, and specifying how companies should use a “first of” cash flow hedging approach to overall cash flows on variable interest payments.
ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
The proposal addresses four questions concerning the financial instruments accounting standard. The FASB attempts to clarify the application of ASC 820, Fair Value Measurement, to an alternative measurement technique. Also, the board proposes exempting private organizations from disclosing the fair value of financial instruments kept to maturity and measure at amortized cost. Another proposed exemption is for health and welfare plans from the scope of the standard. Additionally, the proposal attempts to resolve whether equity securities lacking readily determinable fair values measured according to the measurement alternative should be re-measured at historical exchange rates.
Comments on the proposal are due Wednesday, December 19.