Public companies and banks that do not file as smaller reporting companies have long wrestled with current expected credit loss accounting, but now privately-held and not-for-profit firms preparing reports for fiscal periods ended in 2023 are subject to the rules, according to the Financial Accounting Standards Board.
As the implementation proceeds it is becoming clear that the rules have consequences for a number of industries beyond the financial sector that has long focused on the matter. The expected credit losses standard was issued in 2016 as FASB sought to foster timelier reporting of financial losses in the wake of concerns about delays in recognizing deteriorated asset values that rose out of the 2008 financial crisis.
The FASB’s “monumental shift in credit loss accounting…is set to change financial reporting for many healthcare entities,” a March 14 report on the accounting firm Marcum’s website states. “Healthcare organizations must prepare for a fundamental change: the proactive estimation of credit losses at the inception of a financial instrument.”
The rules are complex but here are a few steps that private firms and NFPs that are early in the adoption process can take to make the process go more smoothly, according to Marcum and the AICPA:
Determine whether it applies to your organization: When it comes to NFPs, the Accounting Standards Update 2016-13, Topic 326 will apply to loan and debt instruments not measured at fair value through net income, financial guarantees and loan commitments, certain lease receivables, and trade receivables, according to an Oct. 1 AICPA report. For healthcare organizations, the most typical asset that could be affected is patient receivables, and, “if your organization has trade receivables at any point in time, the answer is yes; this standard is applicable and required,” Marcum states.
Know when it doesn’t apply: For nonprofits, contributions/pledges receivable and most grants receivable, if they are following the contribution model for revenue recognition, are not included in the scope of the rule, AICPA states.
Pick a methodology: If the rule applies to a NFP, they must then choose the way they will determine the CECL allowance. That could range from discounted cash flow methods to probability-of-default methods or others, but it has to be “supportable” and “reasonable,” according to the AICPA.
Prepare for more disclosures: CECL requires more information. That could include: noting allowance for credit losses on the balance sheet, a description of the company’s policy and methodology related to the new standard, and any roll forward of the allowance for credit losses should be cited in the financial statements, according to Marcum.
Keep an eye out for more change on the horizon: As part of its standard review process, the FASB is currently considering updating and simplifying the CECL standard. Under current generally accepted accounting principles, there are effectively two models for reporting such assets depending on whether the assets are deemed healthy or deteriorated, CFO Dive previously reported. With the new proposal, there would be no credit loss recorded on acquisition.
