Third Quarter Financial Services Update Highlight – Second Staff Document Issued on Credit Loss Rules

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Elliott Davis Financial Services Group

The FASB on July 17, 2019, released its second staff Q&A document, Developing an Estimate of Expected Credit Losses on Financial Assets, to address 16 questions related to ASU 2016-13, Measurement of Credit Losses on Financial Instruments.

When a company develops an estimate of its expected credit losses for financial assets (held at amortized cost at the reporting date), the guidance requires that it considers all available and relevant information. Companies need to consider, for example, historical experience, current conditions and reasonable and supportable forecasts. The objective is for the entity to estimate the net amount it expects to collect on the financial assets.

Companies raised questions about acceptable approaches for determining reasonable and supportable forecasts and techniques for reverting to historical loss information when developing the estimate, according to the main text of the Q&A document.

Specifically, the Q&A provides answers to the following questions:

  • Does the application of the word forecast in paragraph 326-20-30-7 infer computer-based modeling analysis is required?
  • If an entity’s actual credit losses differ from its estimate of expected credit losses, is it required to modify its forecasting methodology?
  • Can an entity’s process for determining expected credit losses consider only historical information?
  • How should an entity determine which historical loss information to use when estimating expected credit losses?
  • Is an entity required to consider all sources of available information when estimating expected credit losses?
  • What if external data are not costly, but internal data are more relevant to an entity’s loss calculation? Is the entity required to obtain and/or use the external data?
  • Should an entity use external data to develop estimates of credit losses if internal information is available?
  • May the length of reasonable and supportable forecast periods vary between different portfolios, products, pools, and inputs?
  • Does an entity need to include the full contractual period (adjusted for prepayments) in its estimate of the reasonable and supportable forecast period?
  • Should an entity reevaluate its reasonable and supportable forecast period each reporting period?
  • Is an entity required to correlate reasonable and supportable forecasts to macroeconomic data, such as nationwide or statewide data?
  • When developing a reasonable and supportable forecast to estimate expected credit losses, is probability weighting of multiple economic scenarios required?
  • Is there a standard threshold that can be used to adjust historical loss information?
  • What should an entity do if it cannot forecast estimated credit losses over the entire contractual term (adjusted for prepayments)?
  • Can an entity adjust the historical loss information used in the reversion period for existing economic conditions or expectations of future economic conditions when developing estimates of expected credit losses?
  • Is an entity required to revert to historical loss information on a straight-line basis?

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