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FASB’s fair value election proposal may provide targeted relief for certain instruments

Amanda Rousseau
Posted by Amanda Rousseau

The current expected credit loss (CECL) model has been considered to be the largest change in the history of bank accounting. Financial institutions and other entities have known about the standard for almost 5 years now and the Financial Accounting Standards Board (FASB) is continuing to make additional changes as it gathers input from interested banks, credit unions, investors and other stakeholders. As the SEC filer deadline is only months away, the FASB and other groups are proposing various revisions to simplify the transition and projected impact on institutions.

On Wednesday, February 6th, FASB issued a proposed update to the credit losses standard to allow newly originated or purchased assets to be measured at fair value instead of being measured solely by the amortized cost basis. Financial statement preparers could elect this “fair value option” on an instrument-by-instrument basis.

Instead of running dual measurements at fair value and an amortized cost basis, preparers can now choose to measure instruments solely at fair value. In the exposure draft about the new proposal, FASB stated that “the targeted transition relief would increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief may also reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information.”

Neekis Hammond, Managing Director of Abrigo Advisory Services, indicated the new proposal could have the potential to impact numerous financial institutions.

“Electing the fair value option is an option open to all types of entities and may be beneficial for banks as well,” he said. “SEC filers and public business entities are already calculating fair value of all assets carried at amortized cost and presenting the results in a disclosure/note. Making this irrevocable election may make sense for certain instruments and/or asset classes.”

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Consistent fair value measurements should make it easier for financial institutions to compare the results for certain asset classes, especially for SEC filers or larger institutions, according to Rob Ashbaugh, Executive Risk Management Consultant at Abrigo.  With this new proposal, financial institutions should have more consistent models to effectively iterate and optimize their calculations.

Ashbaugh plans to discuss the proposed fair value option in an upcoming webinarCECL in the News: What’s New & How It Might Affect Your Institution’s CECL Implementation. He will also interpret other recently passed and projected CECL developments, such as recoveries/prepayments, a three-year capital phase-in rule, separation of the leases standard, CECL extensions, forecasting, disclosures and more.

“The fair value option is a significant change due to its instrument-by-instrument component,” said Hammond. “Acquisitive institutions may want to elect this option for certain acquired instruments and accounted for at fair value on Day 1.”

According to FASB, institutions with available for sale (AFS) securities might favor the change since they have already been electing this measurement. The CECL standard initially modified the accounting for these securities by requiring them to be individually assessed for credit losses when fair value is less than the amortized cost basis. 

The FASB said it was seeking feedback on the proposal, adding that its 30-day comment period ends on March 8.

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tags: CECL, CECL implementation, CECL model, CECL transition