Implementation guidance for credit losses standard published

The American Institute of Certified Public Accountants (AICPA) on Jan. 23, 2019, said it issued guidance for implementing the Financial Accounting Standards Board’s (FASB) credit losses standard.

The Audit and Accounting Guide (AAG-CECL) is intended to help lending institutions and insurers implement Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

The FASB published the standard in June 2016 to correct an issue that emerged during the 2008 financial crisis and require banks and other financial institutions to more quickly recognize losses on financial instruments that are losing value.

The credit loss model, also known as current expected credit losses (CECL), requires banks and other lenders to update their methods for calculating their loan loss allowances, which most banks expect to increase under the new accounting. The standard also requires banks and other businesses to look to the foreseeable future, consider all reasonable and supportable losses that could happen over the life of the loan, trade receivable, or security in question, and set aside reserves to cover the losses. Currently, banks write down losses only after borrowers defaulted on their payments under the incurred loss model.

FASB Accounting Standards Codification (ASC) 326 is set to go into effect in 2020.

When the FASB published ASU No. 2016-13, the AICPA organized the Credit Loss Task Force to identify and address accounting implementation issues.

“In light of the new accounting requirements, this publication will address accounting implementation issues identified by the task force as well as provide in-depth coverage of audit considerations from risk assessment and planning to execution of the audit,” the AICPA said and added that it will regularly update accounting and auditing content in future editions of this guide as task forces finalize each implementation issue.

Experts across the profession developed and reviewed the guidance, and the AICPA’s Financial Reporting Executive Committee (FinREC), or one of its subcommittees, reviewed the guide. The AICPA’s Auditing Standards Board (ASB) issues auditing guidance in the AICPA’s audit and accounting guides, and they are considered authoritative guidance.

The guide identifies key requirements of Financial Accounting Standards Board (FASB) ASC 326 and describes FinREC’s understanding of prevalent or sole industry practice concerning certain issues. Moreover, the guide indicates that FinREC expresses a preference for another practice that is not the prevalent or sole industry practice.

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