
The Financial Accounting Standards Board (FASB) took up the Private Company Council’s (PCC) project applying Topic 326, Financial Instruments—Credit Losses, which requires organizations to measure all expected credit losses for financial instruments held at the reporting date.
According to the recap, the proposed update simplifies how private firms and most not-for-profit entities account for credit losses from current accounts receivable and contract asset balances arising from revenue transactions.
The FASB directed the staff to draft a proposed Accounting Standards Update for vote by written ballot. The board also set a 45-day comment period for the update.
Under the simplified approach, private companies do not need to adjust historical loss information to reflect changes related to relevant economic data. They may assume that current economic conditions as of the balance sheet date will continue during the forecast period.
The FASB decided that private companies and not-for-profit entities, excluding not-for-profit conduit bond obligors, would be eligible for the simplified approach. It also endorsed the PCC’s stance on the scope of the simplified approach. The PCC decided that the approach would cover current accounts receivable and contract asset balances from transactions accounted for under Topic 606, Revenue from Contracts with Customers, which deferred the effective dates of certain accounting standards updates.
The FASB also endorsed the PCC’s decision to recognize the measurement by practical expedient. For entities that choose the practical expedient, an accounting policy election was designed to simplify the credit loss allowance determination.
An entity that elects the practical expedient would not be required to adjust historical loss information to reflect changes related to relevant economic data. It can also make an accounting policy election to consider subsequent cash collection after the balance sheet date, but prior to the date the financial statements are available to be issued.
The FASB also endorsed the PCC’s stance of requiring that an entity disclose when the practical expedient and accounting policy election have been utilized. It also supported the council’s decision to require a prospective transition method, with the ability for an entity to forgo a preferability assessment the first time it elects the practical expedient and the accounting policy election.
Finally, the board said it had received enough information and analysis to decide on the update’s amendments. It concluded that the anticipated benefits would outweigh the potential costs.