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New Accounting Standard for Recognizing Credit Losses

Posted by Admin Posted on June 22 2016

In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2016-13 , Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  Beginning in 2021, credit losses will be recognized using an "expected loss" model (i.e. losses are recorded based on the full amount of expected losses), rather than the current "incurred loss" model (i.e., losses are not recorded until it is probable that a loss has been incurred).  Under this more conservative model, credit losses will be recognized earlier than they were previously.

The standard will apply to all entities with financial assets, such as trade receivables and loans. Thus, expected credit losses will be measured based on past experience and current and reasonably supportable forecasted conditions.  Though many of the loss estimation techniques currently being applied will continue to be permitted, the inputs to those techniques will change to reflect the full amount of expected losses. 

The new standard is not effective until calendar 2021 for non-public entities, with early implementation allowed in 2019.