Topic 326 - Financial Instruments-Credit Losses standard, by Cynthia Bassett Hartwig

Topic 326, also known as the Financial Instruments–Credit Losses standard.

1. Definition:

   1. Topic 326 provides guidance on how entities should account for credit losses on financial assets.

   2. It replaces the previous “incurred loss” model with an “expected credit losses” (CECL) methodology.

   3. CECL requires estimating credit losses based on historical data, current conditions, and reasonable forecasts.

2. Applicability:

   1. Topic 326 applies to all entities, not just banks. It covers a broad range of financial assets.

   2. In-scope assets include those measured at amortized cost basis (e.g., loans, receivables, and leases).

3. Impact on Financials:

   1. Entities must recognize expected credit losses upfront, reflecting the risk throughout the holding period.

   2. This change affects profitability, reserves, and balance sheet presentation.

   3. It may lead to earlier recognition of credit losses, impacting net income and equity.

4. Display Requirements:

   1. For public business entities, the amendments require disclosing current-period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20.

   2. These disclosures enhance transparency about credit quality and loss experience.

5. Effective Dates:

   1. For entities that adopted the previous standard (Update 2016-13), the changes are effective for fiscal years beginning after December 15, 2022, including interim periods.

   2. Entities apply the amendments prospectively, except for troubled debt restructurings (TDRs), where a modified retrospective transition method is allowed.

Remember, this is not legal or accounting advice. Please seek the advice of a professional in the field for how it will be applied to your specific entity.