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Under current GAAP, a number of impairment models exist for various types of financial instruments not measured at fair value through net income (i.e., assets measured at amortized cost or at fair value through other comprehensive income). These models are backward looking in that impairment is recognized when losses have been incurred. Subsequent to the financial crisis, these models were criticized for delaying loss recognition until the point at which the loss occurs as opposed to when a loss is expected.
In response to stakeholders' concerns, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“the ASU”). The ASU describes the current expected credit loss (CECL) model, which requires recognition of expected credit losses through an allowance account that is re-measured at each reporting date. The FASB's new guidance simplifies current GAAP in that it creates a single model to measure impairment on financial assets measured at amortized cost, net investments in sales-type and direct financing leases recognized by a lessor under the new leases standard (ASC 842), and certain off-balance sheet credit exposures.
The FASB debated whether the CECL model should also be applied to available-for-sale debt securities (i.e., assets measured at fair value through other comprehensive income), but ultimately opted to preserve the existing impairment model, albeit with a few changes.

1Financial assets measured at amortized cost in scope of the model include financing receivables (contractual rights to receive money either on demand or on fixed or determinable dates that are recognized as assets in the entity's statement of financial position [e.g., loans receivable]), held-to-maturity debt securities, receivables arising from revenue transactions (e.g., trade receivables), reinsurance receivables, and receivables related to repurchase and securities lending agreements.

2Off-balance sheet credit exposures in scope of the model include off-balance sheet loan commitments, standby letters of credit, financial guarantees not accounted for as insurance, and other similar instruments other than those within the scope of ASC 815, Derivatives and Hedging.


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