Accounting standard ASC 326- Financial Instruments- Credit Losses: Measurement of Credit Losses on Financial Instruments (also known as CECL) is meant to increase balance sheet transparency and requires entities to recognize estimated credit losses expected to occur over the remaining life of certain financial assets. It is important for entities to understand how the new standard may affect them and how to get in compliance. While the Financial Accounting Standards Board initially delayed the effective dates for the CECL standard, it i effective for private companies with fiscal years beginning after December 15, 2022.
The new guidance significantly impacts banks and other financial institutions, but it does apply to other entities that have the following assets:
The purpose of the CECL method is to create a more insightful, timely and consistent estimate of expected credit losses by requiring entities to recognize an allowance for lifetime expected losses on financial assets at the time of origination or acquisition, using historical data, current conditions, and future forecasts. Under prior Generally Accepted Accounting Principals (GAAP) entities utilize the incurrent loss model, which delays the recognition of credit losses until they become probable, that is typically, recorded after the asset established. The CECL model requires entities to account for losses when losses are expected, which is typically when the asset is initially recorded.
Under the CECL method companies are required to estimate expected credit losses. This model requires that your company base its estimates on historical loss experience with similar assets and current conditions which exist in the current GAAP model. The CECL model adds a new wrinkle and requires the use of reasonable and supportable forwardlooking information that impacts the expected collectability of the reports amount of the financial assets.
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