Codification Improvements—Financial Instruments—Credit Losses

Accounting Standards Update 2018-19—Codification Improvements to Topic 326, Financial InstrumentsCredit Losses

 

Overview


On November 15, 2018 the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update which updated the transition and effective date for nonpublic business entities along with clarifying that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounting for in accordance with Topic 842, Leases.  

The Board has an ongoing project on its agenda for improving the Codification or correcting its unintended application. The items addressed in that project generally are not expected to have a significant effect on current accounting practice or to create a significant administrative cost for most entities. The amendments in this Update are similar to those items. However, the Board decided to issue a separate Update for improvements related to Update 2016-13 to increase stakeholders’ awareness of the amendments to scope and transition and effective date requirements and to expedite the improvements.
 
The amendments in this Update include items brought to the Board’s attention by stakeholders. The amendments align the implementation date for nonpublic entities’ annual financial statements with the implementation date for their interim financial statements and clarify the scope of the guidance in the amendments in Update 2016-13.
 
Area for Improvement Summary of Amendments
Issue 1: Transition and Effective Date for Nonpublic Business Entities

The amendments in Update 2016-13 are effective for nonpublic business entities for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The transition guidance in paragraph 326- 10-65-1(c) requires an entity to make a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the amendments are effective.
 
Stakeholders raised questions about whether it was the Board’s intent to require nonpublic business entities to effectively adopt the amendments as of January 1, 2021, because of the cumulative-effect adjustment as of that date, and whether it was the Board’s intent to require
the same effective date for nonpublic business entities and public business entities that do not meet the definition of a Securities and Exchange Commission (SEC) filer.
 
The amendments in this Update mitigate transition complexity by requiring that for nonpublic business entities the amendments in Update 2016-13 are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.
Issue 2: Operating Lease Receivables

The scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost, includes financial assets measured at amortized cost basis, including net investments in leases arising from sales-type and direct financing leases. The scope does not specifically address receivables arising from operating leases.
 
Stakeholders raised questions about whether operating lease receivables would be included within the scope of Subtopic 326-20 because they appear to meet the definition of a financing receivable measured at amortized cost basis.
The amendment clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases.


How Do the Amendments Improve Current Generally Accepted Accounting Principles (GAAP)?


The amendments in this Update represent changes to clarify, correct errors in, or improve the Codification. The amendments should make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications.
 

Effective Date and Transition


The effective date and transition requirements for the amendments in this Update are the same as the effective dates and transition requirements in Update 2016- 13, as amended by this Update.

Additional Information

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