After the financial crisis, many constituents criticized the accounting models for recognizing credit losses on financial assets because many of these models delay recognition until a loss is incurred. In an April 2009 report analyzing the causes of the global financial crisis, the Group of 20, consisting of the finance ministers and central bank governors of the major global economies, made several recommendations. Among other things, the report recommended that the accounting principles related to credit loss provisioning be improved to permit consideration of a broader range of credit information.
The Financial Crisis Advisory Group (FCAG) was established by the FASB and the IASB to advise the Boards on the standard-setting implications of the global financial crisis and potential changes to the regulatory environment. The FCAG noted in its July 2009 report that the financial crisis exposed weaknesses in financial reporting that included the delayed recognition of losses associated with loans, structured credit products, and other financial instruments by banks, insurance companies, and other financial institutions. They recommended that the FASB and IASB explore an accounting model for impairment that uses more forward-looking information, such as an expected loss model or fair value model.
The FASB has issued two standards that address the accounting for financial instruments, ASU 2016-01
, Recognition and Measurement of Financial Assets and Financial Liabilities,
and ASU 2016-13
, Measurement of Credit Losses on Financial Instruments
. These standards started out as part of the FASB and IASB’s joint project on the accounting for financial instruments, which was intended to address the FCAG report as well as simplify and harmonize the accounting for financial instruments under US GAAP and IFRS. During deliberations on these topics, however, the FASB and IASB reached several different decisions; therefore, convergence will not be achieved. Subsequent to the issuance of these standards, the FASB issued additional Accounting Standards Updates amending and clarifying the guidance based on feedback from constituents and discussions of the Transition Resource Group.
Refer to LI 13 for information on the effective dates for ASU 2016-01
and ASU 2016-13
and their related amendments.
The guidance reflected in this PwC guide assumes that ASU ASU 2016-01
, ASU 2016-13
, ASU 2018-03
, ASU 2018-19
, ASU 2019-04
, and ASU 2019-05 have been adopted. Although some significant aspects of the accounting for loans and investments have changed as a result of the aforementioned ASUs (for example, the accounting for equity securities and the accounting for impairments of loans and securities), other aspects of the accounting for these instruments remains the same.