Client Alert: FASB Expected Credit Loss Methodology

Sullivan & Cromwell LLP - June 23, 2016

Last week, the Financial Accounting Standards Board (the “FASB”) issued its long-anticipated update to Financial Instruments – Credit Losses (ASC Topic 326) – Measurement of Credit Losses on Financial Instruments (the “Revised Credit Loss Methodology”).  The Revised Credit Loss Methodology, when implemented, will replace U.S. GAAP’s current “incurred loss” approach to the recognition of credit losses on financial assets measured on an amortized cost basis with a “forward-looking” approach based on the expected credit loss over the life of the instrument.  Under U.S. GAAP’s current approach, an entity does not reflect credit losses in its financial statements until such losses are probable or have been incurred and generally consider only past events and current conditions in making these determinations.

For SEC reporting companies, the Revised Credit Loss Methodology will become effective “for fiscal years beginning after December 15, 2019, including interim periods within such years” such that the first reporting period under the new methodology will be for the quarter ending March 31, 2020 for calendar-year filers.  Early adoption is permitted for fiscal years beginning after December 15, 2018.