FASB proposes changes to new standards on financial instruments, including CECL

On November 19, 2018, the FASB issued an Exposure Draft, Codification Improvements – Financial Instruments, to clarify guidance involving credit losses (Topic 326), derivatives and hedging (Topic 815) and recognition and measurement of financial assets and liabilities (Subtopic 825-10).  Comments are due by December 19, 2018.

The main provisions of the amendment are summarized and outlined in five topic areas.

The most significant proposed amendments over Credit Losses include:

  • Codification improvements from the June 11, 2018 TRG meeting that covers accrued interest, recoveries, and transfers between held-for-investment and held-for-sale classifications.

The proposal allows companies to separately measure an allowance for credit losses on accrued interest receivable from the amortized cost basis of the financial asset.

The proposal clarifies that companies should include all expected recoveries in its estimate and forecasts.

Proposed amendments to Subtopic 310-10, Receivables, Subtopic 948-310, Financial Services – Mortgage Banking, Receivables and Subtopic 320-10, Investments, Debt Securities involving transfers between AFS and HTM that requires the reversal of any allowance for credit losses or valuation allowance previously measured when transferring the receivable/security and apply measurement guidance in accordance with the new category.

  • Codification improvements to Topic 326 and items related to Update 2016-13 related to collateral dependent loans, variable-rate financial assets, reinsurance recoverables, and prepayments.

Clarifies guidance involving collateral dependent loans that requires that the fair value of collateral be used to determine the expected credit losses when foreclosure is probable.  The proposal also requires that companies consider costs to sell an asset when foreclosure is probable if the company intends to sell the asset rather than operate the collateral.

 Clarifies and allows companies to use projections of future interest rate environments when using discounted cash flows on variable-rate financial assets and determining the effective interest rate to discount those expected cash flows.

 Clarifies that reinsurance recoverables that are measured on a net present value basis in accordance with Topic 944, Financial Services, Insurance are within the scope of Subtopic 326-20.

The proposed amendments allow companies to consider prepayments and make a policy election to adjust their effective interest rate for future expected prepayments in their discounted cash flows models to appropriately isolate credit risk.  However, the FASB also clarifies that this amended guidance is not applicable to TDR’s.

  • Codification improvements from the November 1, 2018 TRG meeting that covers vintage disclosures and contractual extensions and renewals.

The proposal provides guidance for companies when a line of credit arrangement is converted to a term loan within the vintage disclosure table, requiring companies to disclose loans converted in the vintage table by year to correspond to the most recent credit decision made by the company.  If the line of credit is covered to a term loan without an additional credit decision or through a TDR, the loan will be presented separately in its own column.

The proposal clarifies that companies should consider extension and renewal options in determining the contractual term of a financial asset.

These codification improvements to CECL address implementation issues noted by constituents and the TRG and provides clarifying intent in many instances.  For companies that have not adopted the new standard on Credit Losses, the effective date will be the same effective date and transition requirement as the new standard.


Diana Cordeiro
Senior Manager
Phone: 617-531-8270

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