Page 2 of 7
information about past events, current conditions, and reasonable and supportable forecasts
relevant to assessing the collectability of the cash flows of financial assets.
Single measurement approach: Impairment measurement under existing U.S. GAAP is often
considered complex because it encompasses a number of impairment models for different
financial assets.
3
In contrast, the new accounting standard introduces a single measurement
objective to be applied to all financial assets carried at amortized cost, including loans held for
investment and held-to-maturity securities.
Scalability: While there are differences between today’s incurred loss methodology and CECL,
the agencies expect the new accounting standard will be scalable to institutions of all sizes.
Similar to today’s incurred loss methodology, the new accounting standard does not prescribe the
use of specific estimation methods. Rather, allowances for credit losses may be determined using
various methods. Additionally, institutions may apply different estimation methods to different
groups of financial assets. Thus, the new standard allows institutions to apply judgment in
developing estimation methods that are appropriate and practical for their circumstances. The
agencies do not expect smaller and less complex institutions will need to implement complex
modeling techniques.
Purchased credit-deteriorated assets: Another change from existing U.S. GAAP involves the
treatment of purchased credit-deteriorated assets. For such assets, the new accounting standard
requires institutions to estimate and record an allowance for credit losses at the time of purchase,
which is then added to the purchase price rather than being reported as a credit loss expense. In
addition, the definition of purchased credit-deteriorated assets
4
is broader than the definition of
purchased credit-impaired assets in current accounting standards.
Accounting for available-for-sale debt securities: The new accounting standard also updates
the measurement of credit losses on available-for-sale debt securities. Under this standard,
institutions will record credit losses on available-for-sale debt securities through an allowance for
credit losses rather than the current practice of write-downs of individual securities for other-
than-temporary impairment.
Retained accounting concepts: The new accounting standard does not change the existing
write-off principle in U.S. GAAP or current nonaccrual practices, nor does it change the current
accounting requirements for loans held for sale, which are measured at the lower of amortized
cost or fair value.
3
Current U.S. GAAP includes five different credit impairment models for instruments within the scope of CECL:
ASC Subtopic 310-10, Receivables-Overall; ASC Subtopic 450-20, Contingencies-Loss Contingencies; ASC
Subtopic 310-30, Receivables-Loans and Debt Securities Acquired With Deteriorated Credit Quality; ASC Subtopic
320-10, Investments-Debt and Equity Securities-Overall; and ASC Subtopic 325-40, Investments-Other-Beneficial
Interest in Securitized Financial Assets.
4
The new accounting standard defines purchased financial assets with credit deterioration as acquired individual
financial assets (or acquired groups of financial assets with similar risk characteristics at the date of acquisition) that
have experienced a more than insignificant deterioration in credit quality since origination, based on the assessment
of the acquirer.