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.
The guidance in this Subtopic applies to the following items:
a. 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
5. Receivables that relate to repurchase agreements and securities lending agreements within the scope of Topic 860.
b. Net investments in leases recognized by a lessor in accordance with Topic 842
c. 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.
d. Reinsurance recoverables that result from insurance transactions within the scope of Topic 944 on insurance.
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.
Financial Asset: Cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to do either of the following:
- Receive cash or another financial instrument from a second entity
- Exchange other financial instruments on potentially favorable terms with the second entity.
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
If an entity performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, the entity shall present the contract as a contract asset, excluding any amounts presented as a receivable. A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer. An entity shall assess a contract asset for credit losses in accordance with Subtopic 326-20 on financial instruments measured at amortized cost. A credit loss of a contract asset shall be measured, presented, and disclosed in accordance with Subtopic 326-20 (see also paragraph 606-10-50-4(b)).
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.
provides a list of items that are outside the scope of the CECL model.
The guidance in this Subtopic does not apply to the following items:
a. Financial assets measured at fair value through net income
b. Available-for-sale debt securities
c. Loans made to participants by defined contribution employee benefit plans
d. Policy loan receivables of an insurance entity
e. Promises to give (pledges receivable) of a not-for-profit entity
f. Loans and receivables between entities under common control.
g. Receivables arising from operating leases accounted for in accordance with Topic 842.
Question LI 7-1 discusses whether the CECL model should only be applied to recognized financial instruments.
Question LI 7-1
Should the CECL impairment model only be applied to recognized financial instruments?
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.
Question LI 7-2 discusses whether tax receivables are in the scope of the CECL model.
Question LI 7-2
Are tax receivables within the scope of the CECL impairment model?
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.
Deferred tax assets are not considered financial assets and are not be subject to CECL.
Question LI 7-3 discusses whether employee forgivable loans are in the scope of the CECL impairment model.
Question LI 7-3
If an employer has the right to receive payment on an employee loan, even if that employee’s employment is terminated, but is expected to forgive the loan as part of a compensation agreement if the borrower remains employed, is the loan in the scope of the CECL impairment model?
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.