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Journal entry — Impairment of financial instruments — FASB discusses modifications, transition, and effective date

Published on: Oct 11, 2012

At its meeting this week, the FASB continued deliberating the current expected credit loss (CECL) model, which is its proposed impairment model for financial assets. The Board discussed (1) whether the CECL model should apply to modifications of financial instruments, including troubled debt restructurings (TDRs); (2) transition guidance; and (3) an effective date for the final guidance and whether to allow early adoption.


The Board tentatively decided that reporting entities should apply the CECL model to modified financial instruments (e.g., loans whose contractual cash flows are modified as part of a TDR). As stated in the Board’s meeting handout, an entity would do this by basing its estimate of expected credit losses for such modified instruments on the “contractual cash flows to which the entity is legally entitled [postmodification].”

The effective interest rate for non-TDR modifications would be adjusted prospectively. However, the Board decided that for TDRs, a reporting entity should retain the original effective interest rate postmodification. To do so, the reporting entity would record a basis adjustment to the modified instrument that is equal to the difference between (1) the carrying amount of the instrument before modification and (2) the present value of the instrument’s postmodification contractual cash flows discounted at the original effective interest rate.

Transition Guidance

The Board also tentatively decided that reporting entities would use a cumulative-effect-adjustment approach at transition. Under this approach, entities would apply the CECL model to all outstanding financial instruments as of the effective date and record any necessary offsetting adjustment to the opening balance of current-period retained earnings. Prior periods would not be adjusted. However, entities would be required to disclose, in the statement of financial position, information about line items that were affected at transition.

Effective Date

The Board also briefly discussed the effective date and the possibility of early adoption, but no decisions were reached on these topics. Instead, the Board decided to solicit comments on them in the upcoming exposure draft.

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