The current expected credit loss (CECL) model under Accounting Standards Update (ASU) 2016-13 aims to simplify US GAAP and provide for more timely recognition of credit losses. In recent years, the Financial Accounting Standards Board (FASB) has issued a number of final and proposed amendments to the standard. What is the practical effect of the guidance as it stands today? Get the highlights in this summary.
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ASC 326 provides comprehensive guidance on recognizing and measuring credit losses related to financial assets measured at amortized cost (e.g., held-for-investment loans and held-to-maturity [HTM] debt securities), net investments in leases, reinsurance recoverables, certain off-balance-sheet credit exposures (e.g., certain loan commitments), and available-for-sale (AFS) debt securities. The CECL impairment model, which is based on expected losses, applies to all of the above except AFS debt securities, which are subject to a different model. The objectives of the CECL model are to:
As noted above, the CECL model is consistently applied to recognize and measure credit losses related to financial assets measured at amortized cost, net investments in leases, reinsurance recoverables, and certain off-balance-sheet credit exposures; the credit impairment model for AFS debt securities is separate. Assets measured at fair value (e.g., trading securities) or under lower-of-cost-or-market models (e.g., mortgage loans held for sale) are not subject to separate credit loss guidance since credit losses are reflected in the measurement models that apply to such assets.
The table below summarizes various measurement approaches that an entity could use to estimate expected credit losses under ASC 326.
Measurement approach |
High-level description |
DCF method |
Expected credit losses are determined by comparing the asset’s amortized cost with the present value of the estimated future principal and interest cash flows. |
Loss-rate method |
Expected credit losses are determined by applying an estimated loss rate to the asset’s amortized cost basis. |
Roll-rate method |
Expected credit losses are determined by using historical trends in credit quality indicators (e.g., delinquency, risk ratings). |
Probability-of-default method |
Expected credit losses are determined by multiplying the probability of default (i.e., the probability the asset will default within the given time frame) by the loss given default (the percentage of the asset not expected to be collected because of default). |
Aging schedule |
Expected credit losses are determined on the basis of how long a receivable has been outstanding (e.g., under 30 days, 31–60 days). This method is commonly used to estimate the allowance for bad debts on trade receivables. |
The FASB has continued its postimplementation review of ASC 326 to assess whether the standard is achieving its objective. As part of this process, the Board is considering stakeholder input and feedback, along with other research, to determine whether improvements could be made.
In addition, the FASB has issued proposed ASUs that would:
See Deloitte’s Roadmap Current Expected Credit Losses for comprehensive discussions related to ASU 2016-13, including the highlights of the recently issued ASU 2022-02 that eliminates the accounting guidance on TDRs for creditors and amends the guidance on vintage disclosures.