On May 15, 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief.

The amendments in the update ease the transition for entities adopting the credit losses standard (ASU 2016-13) and increase the comparability of financial statement information. With the exception of held-to-maturity debt securities, the amendments allow entities to irrevocably elect to apply the fair value option to financial instruments that were previously recorded at amortized cost basis within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost.

Key Provisions

The fair value option included in Subtopic 825-10, Financial Instruments—Overall, allows entities to measure certain financial assets at fair value that would have otherwise been measured at amortized cost.

Current Fair Value Option Election

Currently, under the provisions of ASU 2016-13, entities that have elected or are planning to elect the fair value option would be required to maintain dual measurement methods, as follows:

• Newly originated or purchased financial assets would be measured at fair value in accordance with Subtopic 825-10
• Previously originated or purchased financial assets would be measured at amortized cost in accordance with Topic 326

As a result, the newly originated or purchased financial assets measured at fair value wouldn’t be comparable to other identical, or similar, previously originated or purchased financial assets measured at amortized cost.

Amended Fair Value Option Election

In order to increase comparability and align measurement methods for similar financial assets, the update provides entities with an irrevocable option to elect the fair value option on an instrument-by-instrument basis, for financial assets measured at amortized cost, and within the scope of Subtopic 326-20.

That means previously originated or purchased financial assets, if eligible, may also be measured at fair value. Electing the fair value option isn’t required, but if the fair value option is elected, the entity must apply guidance per Subtopics 820-10 and 825-10.

The fair value option can’t be applied to held-to-maturity debt securities.

Effective Dates

The effective dates and transition requirements are the same as those in ASU 2016-13 for entities that haven’t yet adopted ASU 2016-13. Read our Alert for adoption requirements, effective dates, and additional details.

For entities that have already adopted ASU 2016-13, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption, including adoption in any interim period, is permitted.

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