In response to concerns regarding the transition to ASU 2016-13, the FASB’s recently issued ASU 2019-05 will allow entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis.
The FASB previously issued ASU 2016-13, which created Topic 326 regarding the reporting of credit losses on financial assets. This standard requires an estimated allowance for credit losses to be reported in a separate valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected. Topic 326 also allows entities to elect the fair value option on newly originated or purchased financial assets. As issued in 2016, a prospective transition approach was required where a financial instrument’s amortized cost basis would be the same before and after implementation. ASU 2016-13 will become effective for public entities for fiscal years beginning after December 15, 2019 and for other entities for fiscal years beginning after December 15, 2020.
Under ASU 2019-05, for entities that anticipate electing the fair value option on newly originating financial assets, this option to change the reporting methodology on existing financial assets will provide more comparability of financial statement information by aligning the measurement methodologies for similar financial assets. The fair value option election does not apply to held-to-maturity debt securities.
The effective date of ASU 2019-05 will align with the implementation date of ASU 2016-13 unless an entity has early adopted ASU 2016-13. For entities that have already adopted ASU 2016-13, the new amendments of ASU 2019-05 will become effective for public entities for fiscal years beginning after December 15, 2019 and for other entities for fiscal years beginning after December 15, 2020 with early adoption permitted.
The full text of ASU 2019-05 is available here.
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