Accounting for Credit Losses Under ASU 2016-13

Anticipating the Impact on Reporting and Disclosure

Ariana Pinello, PhD, CPA, CIA, and Ernest Lee Puschaver, CPA

The method used in determining the appropriateness of an allowance for credit losses (ACL) has been a challenging financial reporting issue for decades. The 2008 financial crisis evidenced a need for reforms, particularly in accounting for credit losses, which had stirred deep controversy with its “incurred-loss” accounting model (John Page and Paul Hooper, “The Fundamentals of Bank Accounting: Its Effect on Current Financial System Uncertainty,” The CPA Journal, March 2013, http://bit.ly/2nbXBES). In June 2016, FASB issued Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326). This ASU represents a significant change in the ACL accounting model by requiring immediate recognition of management's estimates of current expected credit losses (CECL). Under the prior model, losses were recognized only as they were incurred, which FASB has noted delayed recognition of expected losses that might not yet have met the threshold of being probable.