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2016-13 Para. BC81: ASC 326 Credit Losses Changes The Accounting For Credit Impairment
2016-13 Para. BC81: ASC 326 Credit Losses Changes The Accounting For Credit Impairment
…the same credit loss model cannot apply because there are different measurement
attributes. The measurement attribute for available-for-sale debt securities
necessitates a separate credit loss model because an entity may realize the total
value of the securities either through the collection of contractual cash flows or
through sales of the securities. Furthermore, the unit of account for these assets is
defined as an individual security, which means collective evaluation is not an
acceptable approach for determining credit losses. Lastly, the amount of credit losses
that will be realized for these assets is limited to the amount that fair value is less
than amortized cost because an entity can sell its investment at fair value to avoid
the realization of credit losses.
In this post, we take a closer look at the impairment model for AFS debt securities under
ASC 326.
Once ASC 326 is adopted or becomes effective, an entity will need to apply different
impairment models for impairment of held-to-maturity (HTM) debt securities and
available-for-sale (AFS) debt securities. HTM debt securities will fall under the Current
Expected Credit Loss (CECL) model while AFS debt securities is carved out from the
CECL model and has its own impairment model.