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Accounting Standards Update 2018-19
November 2018
Codification Improvements to Topic 326, Financial Instruments—Credit Losses
An Amendment of the FASB Accounting Standards Codification®
The FASB Accounting Standards Codification® is the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. An Accounting Standards Update is not authoritative; rather, it is a document that communicates how the Accounting Standards Codification is being amended. It also provides other information to help a user of GAAP understand how and why GAAP is changing and when the changes will be effective.
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FINANCIAL ACCOUNTING SERIES (ISSN 0885-9051) is published monthly with the exception of May and October by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116. Periodicals postage paid at Norwalk, CT and at additional mailing offices. The full subscription rate is $283 per year. POSTMASTER: Send address changes to Financial Accounting Series, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116. | No. 478
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Summary

Why is the FASB issuing this accounting standards update (update)?

On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss methodology for the impairment of financial assets measured at amortized cost basis. That methodology replaces the probable, incurred loss model for those assets. Through that Update, the Board added Topic 326 and made several consequential amendments to the FASB Accounting Standards Codification®.
The Board has an ongoing project on its agenda for improving the Codification or correcting its unintended application. The items addressed in that project generally are not expected to have a significant effect on current accounting practice or to create a significant administrative cost for most entities. The amendments in this Update are similar to those items. However, the Board decided to issue a separate Update for improvements related to Update 2016-13 to increase stakeholders’ awareness of the amendments to scope and transition and effective date requirements and to expedite the improvements.
The amendments in this Update include items brought to the Board’s attention by stakeholders. The amendments align the implementation date for nonpublic entities’ annual financial statements with the implementation date for their interim financial statements and clarify the scope of the guidance in the amendments in Update 2016-13.
Area for Improvement
Summary of Amendments
Issue 1: Transition and Effective Date for Nonpublic Business Entities
The amendments in Update 2016-13 are effective for nonpublic business entities for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The transition guidance in paragraph 326-10-65-1(c) requires an entity to make a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the amendments are effective.
Stakeholders raised questions about whether it was the Board’s intent to require nonpublic business entities to effectively adopt the amendments as of January 1, 2021, because of the cumulative-effect adjustment as of that date, and whether it was the Board’s intent to require the same effective date for nonpublic business entities and public business entities that do not meet the definition of a Securities and Exchange Commission (SEC) filer.
The amendments in this Update mitigate transition complexity by requiring that for nonpublic business entities the amendments in Update 2016-13 are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.
Issue 2: Operating Lease Receivables
The scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost, includes financial assets measured at amortized cost basis, including net investments in leases arising from sales-type and direct financing leases. The scope does not specifically address receivables arising from operating leases.
Stakeholders raised questions about whether operating lease receivables would be included within the scope of Subtopic 326-20 because they appear to meet the definition of a financing receivable measured at amortized cost basis.
The amendment clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases.

When will the amendments be effective?

The effective date and transition requirements for the amendments in this Update are the same as the effective dates and transition requirements in Update 2016-13, as amended by this Update.

Amendments to the FASB Accounting Standards Codification®

Summary of amendments to the Accounting Standards Codification

1. The following table provides a summary of the amendments to the Accounting Standards Codification.
Areas for Improvement
Related Paragraphs
Issue 1: Transition and Effective Date for Nonpublic Business Entities
3 through 5
Issue 2: Operating Lease Receivables
6 and 7

Introduction

2. The Accounting Standards Codification is amended as described in paragraphs 3–10. In some cases, to put the change in context, not only are the amended paragraphs shown but also the preceding and following paragraphs. Terms from the Master Glossary are in bold type. Added text is underlined, and deleted text is
struck out
.

Issue 1—Transition and effective date for nonpublic business entities

3. The amendments to paragraph 326-10-65-1 relate to the transition and effective date requirements for nonpublic business entities, including not-for-profit entities within the scope of Topic 958 and employee benefit plans within the scope of Topics 960 through 965 on plan accounting.
4. The Board’s original intent was to require that nonpublic business entities apply the amendments in Update 2016-13 at the end of the same fiscal year as those public business entities that do not meet the definition of an SEC filer, thus providing additional time to implement the amendments in Update 2016-13 for interim periods. However, the Board understands that the amendments related to the transition and effective date in Update 2016-13 may be operably burdensome for many nonpublic business entities and may not provide nonpublic business entities with additional time to implement the amendments in Update 2016-13, which was the Board’s intent. Therefore, to mitigate transition complexity, the amendments in this Update align the implementation date of annual financial statements for nonpublic business entities, including not-for-profit entities within the scope of Topic 958 and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, with the implementation date for their interim financial statements.

Amendments to Subtopic 326-10

5. Amend paragraph 326-10-65-1(a), as follows:
Financial Instruments—Credit Losses—Overall
Transition and Open Effective Date Information
> Transition Related to Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
326-10-65-1 The following represents the transition and effective date information related to Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments:
  1. The pending content that links to this paragraph shall be effective as follows:
    1. For public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years
    2. For public business entities that do not meet the definition of an SEC filer, for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years
    3. For all other entities, including not-for-profit entities within the scope of Topic 958 and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, for fiscal years beginning after December 15, 2021
      2020
      ,
      and
       including interim periods within those fiscal years
      beginning after December 15, 2021
      .

Issue 2—Operating lease receivables

6. The Board provided a model in Subtopic 842-30, Leases—Lessor, in the amendments in Accounting Standards Update No. 2016-02, Leases (Topic 842), to account for operating leases, including an assessment of the collectibility of operating lease payments and how to recognize lease income based on those payments. The Board did not intend to change lessor accounting for operating leases through the issuance of the amendments in Update 2016-13. The amendments to paragraph 326-20-15-3 clarify that a receivable arising from an operating lease that is accounted for by a lessor in accordance with Topic 842 is not within the scope of Subtopic 326-20.

Amendments to Subtopic 326-20

7. Amend paragraph 326-20-15-3, with a link to transition paragraph 326-10-65-1, as follows:
Financial Instruments—Credit Losses—Measured at Amortized Cost
Scope and Scope Exceptions
> Instruments
326-20-15-2 The guidance in this Subtopic applies to the following items:
  1. Financial assets measured at amortized cost basis, including the following:
    1. Financing receivables
    2. Held-to-maturity debt securities
    3. Receivables that result from revenue transactions within the scope of Topic 605 on revenue recognition, Topic 606 on revenue from contracts with customers, and Topic 610 on other income
    4. Reinsurance recoverables that result from insurance transactions within the scope of Topic 944 on insurance
    5. Receivables that relate to repurchase agreements and securities lending agreements within the scope of Topic 860
  2. Net investments in leases recognized by a lessor in accordance with Topic 842 on leases
  3. Off-balance-sheet credit exposures not accounted for as insurance. Off-balance-sheet credit exposure refers to credit exposures on off-balance-sheet loan commitments, standby letters of credit, financial guarantees not accounted for as insurance, and other similar instruments, except for instruments within the scope of Topic 815 on derivatives and hedging.
326-20-15-3 The guidance in this Subtopic does not apply to the following items:
  1. Financial assets measured at fair value through net income
  2. Available-for-sale debt securities
  3. Loans made to participants by defined contribution employee benefit plans
  4. Policy loan receivables of an insurance entity
  5. Promises to give (pledges receivable) of a not-for-profit entity
  6. Loans and receivables between entities under common control.
  7. Receivables arising from operating leases accounted for in accordance with Topic 842.

Amendments to existing pending content

8. Amend the transition dates of all pending content paragraphs that link to transition guidance paragraph 326-10-65-1 as follows:
Pending Content:
Transition Date: (P) December 16, 2019; (N)
December 16, 2020
December 16, 2021 | Transition Guidance: 326-10-65-1

Amendments to status sections

9. Amend paragraph 326-10-00-1, by adding the following item to the table, as follows:
326-10-00-1 The following table identifies the changes made to this Subtopic.
Paragraph
Action
Accounting Standards Update
Date
326-10-65-1
Amended
2018-19
11/15/18
10. Amend paragraph 326-20-00-1, by adding the following item to the table, as follows:
326-20-00-1 The following table identifies the changes made to this Subtopic.
Paragraph
Action
Accounting Standards Update
Date
326-20-15-3
Amended
2018-19
11/15/18
The amendments in this Update were adopted by the unanimous vote of the six members of the Financial Accounting Standards Board:
Russell G. Golden, Chairman
James L. Kroeker, Vice Chairman
Christine A. Botosan
Gary R. Buesser
Marsha L. Hunt
R. Harold Schroeder

Background information and basis for conclusions

Introduction

BC1. The following summarizes the Board’s considerations in reaching the conclusions in this Update. It includes reasons for accepting certain approaches and rejecting others. Individual Board members gave greater weight to some factors than to others.

Background information

BC2. On June 16, 2016, the FASB issued Update 2016-13, which introduced an expected credit loss methodology for the impairment of financial assets measured at amortized cost basis. That methodology replaces the probable, incurred loss model for these assets. Through Update 2016-13, the Board added Topic 326 and made several consequential amendments to the Codification.
BC3. The Board has an ongoing project on its agenda for improving the Codification or correcting its unintended application. The items addressed in that project generally are not expected to have a significant effect on current accounting practice or to create a significant administrative cost for most entities. The amendments in this Update are similar to those items. However, the Board decided to issue a separate Update for Codification improvements related to Update 2016-13 to increase stakeholders’ awareness of the amendments to scope and transition and effective date requirements and to expedite the improvements.
BC4. The amendments in this Update include items brought to the Board’s attention by stakeholders through the implementation efforts on Update 2016-13. The Board issued a proposed Accounting Standards Update, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, on August 20, 2018, with a 30-day comment period that ended on September 19, 2018. The Board received 58 comment letters on the proposed Update. Overall, comment letter respondents broadly supported the Board’s proposed amendments to mitigate transition complexity for nonpublic business entities and to clarify the scope of Subtopic 326-20 regarding operating lease receivables accounted for in accordance with Topic 842.

Benefits and costs

BC5. The amendments in this Update align the implementation date for nonpublic entities’ annual financial statements with the implementation date for their interim financial statements, clarify the scope of the guidance in the amendments in Update 2016-13, and do not change any of the principles in the guidance in the amendments in Update 2016-13. Therefore, the Board does not anticipate that entities would incur significant costs because of these amendments. The amendments should provide the benefit of mitigating transition complexity and improving consistent application of GAAP by clarifying pending guidance within GAAP.

Basis for conclusions

Issue 1—Transition and effective date for nonpublic business entities

BC6. Paragraph 326-10-65-1 provides the following transition and effective date requirements for Update 2016-13:
  1. For public business entities that meet the definition of an SEC filer, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years
  2. For public business entities that do not meet the definition of an SEC filer, for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years
  3. For all other entities, including not-for-profit entities within the scope of Topic 958 and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.
BC7. Additionally, under paragraph 326-10-65-1(c), an entity should apply the amendments in Update 2016-13 by means of a cumulative-effect adjustment to the opening retained earnings as of the beginning of the first reporting period in which the amendments are effective.
BC8. Stakeholders asked whether the Board intended to require nonpublic business entities to adopt the amendments in Update 2016-13 as of the beginning of the first reporting period in which the amendments are effective by means of a cumulative-effect adjustment to opening retained earnings. Stakeholders noted that the transition and effective date guidance in Update 2016-13 effectively aligns the implementation date for both public business entities that do not meet the definition of an SEC filer and nonpublic business entities. However, stakeholders noted that nonpublic business entities expected additional implementation time when compared with both public business entities that meet the definition of an SEC filer and those public business entities that do not meet the definition of an SEC filer.
BC9. The Board’s original intent was to require that nonpublic business entities apply the amendments in Update 2016-13 at the end of the same fiscal year as those public business entities that do not meet the definition of an SEC filer, thus providing additional time to implement the amendments in Update 2016-13 for interim periods. However, the Board understands that the amendments related to the transition and effective date in Update 2016-13 may be operably burdensome for many nonpublic business entities and may not provide nonpublic business entities with additional time to implement the amendments in Update 2016-13. Therefore, to mitigate transition complexity, the amendments in this Update align the implementation date of annual financial statements for nonpublic business entities, including not-for-profit entities within the scope of Topic 958 and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, with the implementation date for their interim financial statements. The Board understands that the requirement to apply the amendments by means of a cumulative-effect adjustment to the opening retained earnings as of the beginning of the first reporting period in which the amendments in Update 2016-13 are effective, which would be January 1, 2021, for calendar year-end nonpublic business entities, does not provide nonpublic business entities with the additional time needed to implement and adopt the amendments of Update 2016-13, which the Board originally intended to provide when deliberating the transition and effective date for nonpublic business entities.
BC10. The amendments in this Update clarify that for nonpublic business entities, including not-for-profit entities within the scope of Topic 958 and employee benefit plans within the scope of Topics 960 through 965, the amendments of Update 2016-13 are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Nonpublic business entities should apply the amendments of Update 2016-13 by means of a cumulative-effect adjustment to the opening retained earnings as of the beginning of the first reporting period in which Update 2016-13 is effective.

Issue 2—Operating lease receivables

BC11. Paragraph 326-20-15-2 defines the scope of Subtopic 326-20, which includes financial assets measured at amortized cost basis, net investments in leases recognized by a lessor in accordance with Topic 842, and off-balance-sheet credit exposures not accounted for as insurance. That paragraph only addresses net investments in leases resulting from sales-type or direct financing leases recognized by a lessor and does not address receivables arising from operating leases recognized by a lessor in accordance with Topic 842. Paragraphs 842-30-25-10 through 25-14 provide a model for assessing the collectibility of operating lease payments and how to recognize lease income based on those payments.
BC12. Stakeholders asked whether operating lease receivables are within the scope of Subtopic 326-20 because they appear to meet the definition of a financing receivable, which is specifically referenced in paragraph 326-20-15-2 as a financial asset. Furthermore, if those receivables are within the scope, the stakeholders asked how an entity should apply both the guidance in Subtopic 326-20 and the guidance in Topic 842 about determining the collectibility of lease payments in an operating lease.
BC13. The Board noted that the guidance in Topic 842 provides an operational model for determining the collectibility of lease payments that is well understood by lessors. The Board did not intend to change lessor accounting for operating leases when it issued Update 2016-13. Therefore, the amendments in this Update clarify that receivables resulting from operating leases accounted for by lessors under Topic 842 are not within the scope of Subtopic 326-20.
BC14. Based on feedback received from comment letter respondents to the proposed Update, the Board clarified that receivables arising from all operating leases accounted for under Topic 842 should be excluded from the scope of Subtopic 326-20 rather than only those accounted for under paragraphs 842-30- 25-10 through 25-14. In addition, the Board clarified that the model for assessing the collectibility of lease payments in paragraphs 842-30-25-12 through 25-13 should be applied to the assessment of collectibility of operating lease receivables, which are earned but unpaid operating lease payments.

Effective date and transition

BC15. The Board decided that the effective date and transition requirements for the amendments in this Update should be the same as the effective date and transition requirements in Update 2016-13, as amended by this Update.

Amendments to the XBRL Taxonomy

The amendments to the FASB Accounting Standards Codification® in this Accounting Standards Update do not require improvements to the U.S. GAAP Financial Reporting Taxonomy (Taxonomy). Any stakeholders who believe that improvements to the Taxonomy are required should provide their comments and suggested improvements at Taxonomy Improvements provided at www.fasb.org.

Copyright by Financial Accounting Standards Board, Norwalk, Connecticut

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