The Financial Accounting Standards Board (FASB) has put forth a proposal known as the Accounting Standards Update (ASU), which focuses on enhancing the accounting practices for purchased financial assets. In an effort to improve this area of accounting, the FASB is actively seeking input and feedback from stakeholders until August 28, 2023.
Following the introduction of the credit losses standard in 2016, outlined in ASU 2016-13, the FASB has been closely monitoring and supporting stakeholders in implementing the standard through a post-implementation review (PIR) process. During this process, the FASB received feedback, particularly from investors, concerning the accounting treatment of financial assets obtained through business combinations or asset acquisitions. Stakeholders expressed the need for a reconsideration of the accounting approach for purchased financial assets.
Current accounting method for acquired financial assets
Currently, under Generally Accepted Accounting Principles (GAAP), purchased financial assets are accounted for using two models. If a purchased financial asset has experienced a significant decline in credit quality since its origination, it is accounted for under the purchased credit deteriorated (PCD) model, where no credit loss is recorded upon acquisition (referred to as the gross-up approach). On the other hand, if the purchased financial asset has not undergone a significant credit deterioration since origination, it is accounted for similarly to an originated financial asset (known as non-PCD accounting). This involves recording a day one credit loss in addition to any credit discount reflected in the fair value of the acquired assets.
Effects on Accountants
The proposed Accounting Standards Update (ASU) by the Financial Accounting Standards Board (FASB) has the potential to impact accountants in various ways. These include:
- Changes in accounting standards: ASUs can introduce modifications to the way chartered accountants record and report financial information. As a result, accountants may need to update their knowledge and skills, as well as make necessary adjustments to their accounting software.
- Increased compliance requirements: ASUs often come with heightened compliance obligations for accountants. This means that accountants may need to dedicate additional time and resources to ensure that their clients’ financial statements align with the latest standards and regulations.
- New challenges: ASUs can pose fresh challenges for accountants. More recent updates may be more intricate compared to previous ones, presenting accountants with new obstacles when assessing the fair value of such assets.
The proposed changes
In response to feedback received from investors and preparers, who found the existence of two accounting models for purchased financial assets needlessly complex, the FASB is proposing a single accounting model for recognizing credit losses on all purchased financial assets. Stakeholders emphasized that the assessment of credit deterioration since origination is subjective and inconsistently applied, resulting in comparability issues and reduced usefulness of financial information. They were particularly concerned about the non-PCD accounting model and the requirement to record a day one allowance in addition to any credit discount already reflected in the initial fair value.
The proposed amendments aim to address these concerns by mandating that all acquired financial assets, with a few limited exceptions, follow the existing gross-up approach.
Date of implementation
Regarding the effective date of these proposed amendments, the FASB will determine it based on the feedback received. The possibility of early adoption will also be considered. Presently, the FASB anticipates that if the amendments are adopted as proposed, they would be implemented on a modified retrospective basis, starting from the beginning of the fiscal year when an entity has adopted the amendments in ASU 2016-13. If necessary, a cumulative-effect adjustment would be recorded at the later of the beginning of that reporting period or the beginning of the earliest period presented.