By Amy Leisinger, J.D.
The Financial Accounting Standards Board has proposed an Accounting Standards Update (ASU) to ease the entities’ transition to the credit losses standard by providing them with the option to measure certain types of assets at fair value. Under the proposed ASU, preparers could irrevocably elect the fair value option for eligible financial assets measured at amortized cost basis upon adoption of the standard. In a press release, FASB notes that the proposed change would increase comparability of financial statements across institutions that otherwise would report similar instruments using different methodologies and potentially decrease costs.
Credit losses standard. Adopted by FASB in June 2016, the standard’s current expected credit losses methodology will replace the incurred loss methodology that financial institutions currently use to recognize credit losses. Under the new methodology, recognition of a credit loss no longer will be delayed until that loss is probable; rather, institutions will be required to use a broader range of data to estimate likely credit losses over the life of an asset or pool of similar assets. Relevant data would include historical performance and both current and predicted future economic conditions.
Proposed fair value option. Since the issuance of the update, FASB has received several letters requesting that it consider amending the transition guidance for the update. Stakeholders noted that some financial statement preparers are planning to elect the fair value option on newly originated or purchased assets, even though those entities have historically measured similar financial assets on an amortized cost basis. Without targeted transition relief, the entities would need to maintain dual measurement methodologies that could result in non-comparable financial statement information.
As such, the proposed amendments would provide an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. An entity that elects the fair value option would subsequently apply the guidance in Subtopics 820-10, Fair Value Measurement—Overall, and 825-10. This change would increase comparability of financial statement information and decrease costs for some preparers while providing financial statement users with more useful information.
Comment period. FASB requests comment on the proposed update, particularly with regard to whether additional disclosures would be needed for the proposed amendments. The Board also asks whether stakeholders agree with its decision not to provide entities with an option to discontinue fair value measurements for financial assets measured at fair value through net income and instead apply the measurement guidance in Subtopic 326-20.
Comments on the proposal are due by March 8, 2019.