Credit Loss Standard Update Could Benefit Subprime Auto Lenders

November 28, 2018

To help lenders that provide auto loans to customers with little to no credit, the Financial Accounting Standards Board (“FASB”) will issue a proposed amendment to the transition guidance for Accounting Standards Update No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

Scheduled for release next year, the proposal would allow subprime auto lenders and other businesses to measure financial instruments, which were previously recorded at amortized cost, at fair value when they apply the credit loss standard beginning in 2020. Existing auto loans would be calculated similarly to loans distributed after the standard’s effective date, which would help investors and analysts make comparisons when reading financial statements.

Under the proposal, businesses could permanently choose the fair value option for financial assets under Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost, that qualify for the fair value option under Subtopic 825-10, Financial Instruments—Overall, on an instrument-by-instrument basis. One subprime auto lender agreed with the fair value option proposal, saying that the option would give financial statement users more meaningful information.

Upon issuance, the proposal will have a 30-day comment period.