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On the Radar — Current expected credit losses

Published on: 10 Dec 2021

The approach used to recognize impairment losses on financial assets has long been identified as a major weakness in current U.S. GAAP, resulting in delayed recognition of such losses and leading to increased scrutiny. Accordingly, the FASB issued ASU 2016-13 to amend its guidance on the impairment of financial instruments. The ASU adds to U.S. GAAP an impairment model known as the current expected credit loss (CECL) model, which is based on expected losses rather than incurred losses. The objectives of the CECL model are to:

  • Reduce the complexity in U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments.
  • Eliminate the barrier to timely recognition of credit losses by using an expected loss model instead of an incurred loss model.
  • Require an entity to recognize an allowance of lifetime expected credit losses.
  • Not require a specific method for entities to use in estimating expected credit losses.

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