In response to the financial crisis of 2008, the FASB was tasked with revisiting the accounting model for impairments of financial assets, resulting in the issuance of ASU 2016-13, Financial Instruments — Credit Losses (codified in ASC 326). ASU 2016-13 requires the use of the current expected credit losses (CECL) impairment model for a broad scope of financial instruments, including financial assets measured at amortized cost (which includes loans, held-to-maturity debt securities and trade receivables), net investments in leases, and certain off-balance sheet credit exposures. The CECL model requires the immediate recognition of estimated expected credit losses over the life of the financial instrument. The estimate of expected credit losses considers not only historical information, but also current and future economic conditions and events.

The FASB has issued a number of ASUs amending the guidance introduced by ASU 2016-13. In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures, which eliminated the accounting guidance for troubled debt restructurings (TDRs) for creditors that have adopted ASU 2016-13. Guidance in this chapter has been updated to reflect the new ASU. Impacted sections are denoted as before or after adoption of ASU 2022-02.

This chapter discusses the CECL impairment model. Figure LI 7-1 shows where additional information can be found on the application of the CECL model to specific types of assets and troubled debt restructurings. This chapter also assumes an entity has adopted ASU 2022-01, Derivatives and Hedging (Topic 815), Fair Value Hedging – Portfolio Layer Method.

Figure LI 7-1
Location of additional information on the CECL impairment model