The CECL model applies to a broad range 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. Given the broad scope of the new guidance, both financial services and non-financial service entities will be affected.

ASC 326-20-15-2 provides information on the scope of the CECL guidance.

Other financial instruments subject to CECL may not be included within this list. For example, receivables subject to CECL may be generated from sales of retired equipment, sales of scrap metal or by-products from manufacturing processes, or refunds due from vendors. Typically, these receivables are short term in duration and payment is expected to be received in under one year. Other examples include loans to officers or employees, store credit card arrangements, and tax refunds for which the taxing authority has issued a legally enforceable instrument for the settlement.

ASC 326-20-20 provides the definition of a financial asset.

Other guidance may require an asset to be assessed for credit losses under ASC 326. For example, in the revenue standard, ASC 606-10-45-3 requires contract assets to be assessed for credit losses under ASC 326-20.

The CECL model does not apply to financial assets carried at fair value with changes in fair value reported in net income. It does not apply to loans held for sale carried at the lower of amortized cost or fair value because changes in credit risk are included in the change in fair value recognized in net income. Available-for-sale (AFS) debt securities, which can be sold prior to their maturity at fair value, are also not subject to the CECL model. See LI 8 for information on the AFS debt security impairment model. Loans and receivables between entities under common control are also outside the scope of the CECL model. This scope exception applies to all reporting entities and includes parent-only financial statements. Loans and receivables between related parties that are not under common control do not fall within this scope exception. 

ASC 326-20-15-3 provides a list of items that are outside the scope of the CECL model.

No. The CECL impairment model should be applied to measure the expected credit losses of certain unrecognized financial instruments, such as certain financial guarantee obligations (guarantee contracts not accounted for as derivatives or insurance contracts) and certain unfunded loan commitments (commitments for which the lender does not have the unconditional right to cancel the commitment).

See LI 7.5 for further information on the application of CECL to off-balance sheet credit exposures.

Typically, no. Most receivables from tax authorities are not considered financial assets since they arise from an imposition of an obligation by law or regulation and do not represent a contractual right to receive cash. However, if a tax receivable is considered a financial asset, it would be within the scope of ASC 326-20. For example, assume a company has a tax refund due from a state, but the state wants to defer settlement. As a result, the state issues an installment note payable to the entity requiring payments over a period of time. The note receivable would be a financial asset subject to CECL.

It depends. Certain loans to employees are considered in substance options and subject to other accounting standards. For example, a non-recourse loan to an employee secured by stock of the employer is considered an unexercised stock option, as described in ASC 718-10-25-3. However, if the loan to the employee is reported as a loan at amortized cost, it would be within the scope of ASC 326-20.

In estimating credit losses, the employer would include amounts it does not expect to collect due to credit risk (for example, amounts not collected from a terminated employee who defaults on the loan). However, we believe an employer would not include amounts it expects to forgive as part of a compensation arrangement once an employee meets the conditions for forgiveness (e.g., continued employment for a specified time) as an expected credit loss. Forgiveness as a result of employee service or performance should be accounted for under the employee compensation guidance, similar to a bonus arrangement earned over time.