Insights

FASB Answers the Million-Dollar Question: What Is the Effective Date for Credit Losses (CECL)?

Classification & Measurement, Leases Effective Dates Set As Well

Nov. 11, 2015

For those following the Financial Accounting Standards Board (FASB) project to overhaul the guidance for credit losses using the current expected credit loss (CECL) model, the million-dollar question has been: When will it be effective? Today, the FASB answered the question for the forthcoming standard and its sister project on classification and measurement, which primarily makes changes for equity securities and disclosures. Apparently it was a good day for deciding effective dates, as the FASB determined those dates for leases as well.

An important decision for the FASB to make was whether to align the effective dates of the three forthcoming standards in what has been called a single “big bang” adoption year or to allow preparers the benefit of staggered adoption dates to reduce operational burdens. The board ended up with a combination.

Following is our understanding of the results of today’s meeting.

Financial Instruments – Impairment

The FASB staff provided results from the external review process, during which a draft was shared with key stakeholders to identify any issues for the board to consider prior to issuing a final standard. The staff summarized the areas of significant comments. The board re-deliberated two matters that were identified during the fatal flaw process: one related to troubled debt restructurings (TDRs) and one related to credit losses on available-for-sale (AFS) debt securities.

Recognizing the pervasive impact that the final standard will have, particularly on the financial institutions industry, the board decided to depart slightly from its definitions of public business entity (PBE) and all other entities for purposes of the effective dates. For this standard, the board decided to define smaller PBEs as PBEs that do not meet the U.S. Securities and Exchange Commission (SEC) filer definition contained in U.S. generally accepted accounting principles (GAAP).

For the effective dates, the FASB decided:

  • For PBEs – Fiscal years beginning after Dec. 15, 2018, including interim periods within those fiscal years
  • For smaller PBEs – Fiscal years beginning after Dec. 15, 2019, including interim periods within those fiscal years
  • For all entities other than PBEs – Fiscal years beginning after Dec. 15, 2019, and interim periods within the fiscal years beginning after Dec. 15, 2020

For all entities other than PBEs (that is, smaller PBEs and entities other than PBEs), the board decided to permit early adoption using the effective dates for PBEs.

The staff plans to discuss remaining issues at the Nov. 23, 2015, board meeting. The board expects to issue a final standard in the first quarter of 2016.

Financial Instruments – Classification and Measurement

The staff provided results from the external review process, including the areas of significant comments. The board concurred with the staff that none of the areas required re-deliberation of the tentative decisions previously reached.

For the effective dates, the FASB decided:

  • For PBEs – Fiscal years beginning after Dec. 15, 2017, including interim periods within those fiscal years
  • For all entities other than PBEs – Fiscal years beginning after Dec. 15, 2018, and interim periods beginning after Dec. 15, 2019

The board decided to permit early adoption upon issuance only for the following:

  • Fair value change resulting from own credit risk for financial liabilities measured under fair value option recognized through other comprehensive income
  • The elimination of fair value disclosure requirements for financial instruments not recognized at fair value by entities that are not PBEs

Also, the board decided that all entities other than PBEs could early adopt using the PBE effective dates.

The board gave the staff permission to proceed with drafting a final standard. Given the early adoption provisions, the board has an objective of issuing the final standard before year-end.

Leases
The leases project was added to the FASB’s agenda in July 2006. Since then, the board has issued three due process documents, received more than 1,700 comment letters, held 15 round tables, and performed other outreach. The primary objective of the project is to bring most leases onto the balance sheet.

For the effective dates, the FASB decided:

  • For PBEs – Fiscal years beginning after Dec. 15, 2018, including interim periods within those fiscal years
  • For all entities other than PBEs – Fiscal years beginning after Dec. 15, 2019, and interim periods within the fiscal years beginning after Dec. 15, 2020

The board decided to permit early adoption upon issuance.

The board discussed the benefits and costs of the changes that a final standard on leases would introduce. After weighing the costs against the benefits, the board gave the staff permission to proceed with drafting a final standard.

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Sydney K. Garmong
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