Jonathan Jacobs, Managing Director in Duff & Phelps' Valuation Advisory Services practice and Jennifer Press and John Schrader, Managing Directors in Duff & Phelps Alternative Asset Advisory practice recently shared their views on the FASB issued Accounting Standard Update (ASU) 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326), which requires a new method for recognizing credit losses. This new method is referred to as the current expected credit loss (CECL) method.
CECL represents a significant change from prior GAAP, which is still used by most entities. Under prior GAAP, loss reserves are recognized when it is probable a loss has already been incurred. The CECL method requires the recognition of all losses expected over the life of a financial instrument upon origination or purchase of the instrument, unless the company elects to recognize such instruments at fair value with changes in profit and loss (the fair value option).
Public companies that are not included as smaller reporting companies will require to implement CECL in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Other entities are permitted to wait until their first fiscal year beginning after December 15, 2022.
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