ASU 2016-13 Current Expected Credit Loss Effective for Private Companies in 2023
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ASU 2016-13 Financial Instruments-Credit Losses, which covers the Current Expected Credit Loss model (also known as CECL), is effective for private companies for years beginning after 12/15/2022. The accounting standard is not just applicable to mortgage banks, but can also impact trade receivables, loan receivables and reinsurance receivables and more for companies in all industries.
Previously, US GAAP required an “incurred loss” methodology for credit losses and loss recognition once probable. Under the old method, historic loss percentages were a common and appropriate method of measurement of credit losses. CECL will require measurement of “expected losses” based on past, present & future. The new guidance requires a forward-looking methodology that incorporates lifetime expected credit losses. In other words, estimated credit losses should be booked concurrently with recognition of the asset (accounts receivable, for example) and the credit loss estimate must be updated during each future reporting period.
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