New Accounting for Credit Losses

If your entity has trade receivables, contract assets, loans, or held-to-maturity debt securities, among other types of financial assets, then the new current expected credit loss (“CECL”) model will affect the way you account for those assets on your US GAAP financial statements. For nonpublic entities, adoption of this new accounting standard takes effect for fiscal years beginning after December 15, 2022.

The CECL model is the new approach required by the Financial Accounting Standards Board (FASB) for recognizing impairment losses on financial assets. In the past, you have probably worked with your accountant to determine an appropriate allowance for uncollectible receivables after it was already probable that they wouldn’t be collected (for example, using receivables outstanding for greater than 90 days). This old model only reflected the amounts you believed to be uncollectible. However, under the CECL model, you now must determine the lifelong total estimated losses at the origination of the financial asset. This allows for timely recognition of credit losses and generally results in recognition of losses earlier.

Things to keep in mind

Using your entity’s historical data, for example your historical write-offs, is a great starting point for estimating impairment losses under the CECL model. However, you must also consider all available and relevant information, such as events and economic conditions taking place during the previous period write-offs, and how those differ from the current conditions. You must also consider any reasonable and supportable forecasts that you may have surrounding these financial assets and any future possible credit losses. In other words, how much do you expect to be uncollectible over the life of the asset? You will need to adjust your starting point accordingly.

Prepare for next year

If you believe that you have financial assets that will be subject to the CECL model, we recommend steps you should take to prepare for next year:

  • Identify the financial assets you have that will be subject to the CECL model.
  • Determine whether you need to make changes to existing credit impairment models to comply with the new standard.

R&A CPAs can help you take a look at your accounts and discuss the impact of adopting this new standard on your financial statements. Give us a call.

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