Easing the transition to the current expected credit loss standard, or CECL, was the goal of a measure the Financial Accounting Standards Board has approved that provides entities the option to measure certain types of assets at fair value.
In a meeting on April 10, the board affirmed its previous decision to allow an entity to irrevocably elect the fair value option for eligible financial assets within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost, on an instrument-by-instrument basis. However, the board also affirmed its previous decision to exclude debt securities classified as held-to-maturity (HTM), from the scope of instruments eligible to elect the fair value option. The FASB directed staff to draft an Accounting Standards Update for vote by written ballot.
“The fair value option is a significant change due to its instrument-by-instrument component,” said Neekis Hammond, Managing Director of Abrigo Advisory Services. “Acquisitive institutions may want to evaluate this option for certain acquired instruments and accounted for at fair value on Day 1.”
Under the update to the CECL standard, newly originated or purchased assets can be measured at fair value instead of being measured solely by the amortized cost basis, which is within the scope of Topic 326 (CECL). Financial statement preparers could elect this “fair value option” on an instrument-by-instrument basis, excluding debt securities classified as HTM. As a result, preparers will be able to choose to measure instruments solely at fair value rather than have to run dual measurements — at fair value and an amortized cost basis/CECL.
In the exposure draft about the new change, FASB stated, “the targeted transition relief would increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets.” The board also said it expected the change might also reduce costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with “decision-useful information.”
Access the recording of the April 10 meeting, meeting handouts and a copy of the tentative decision here.