Matt Zollinger, CPA, is a life insurance audit specialist with 9 years of experience in the industry. 


Effective Date

The amendment in ASU 2016-13 is effective for privately held companies for fiscal years beginning after December 15, 2022, or January 1, 2023, for a calendar year entity, Including interim periods within those fiscal years.


U.S. GAAP currently requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. Both financial institutions and users of their financial statements expressed concern that this methodology restricted the ability to record credit losses that are expected, but do not yet meet the “probable” threshold. The global financial crisis underscored those concerns because users analyzed credit losses by using forward-looking information to assess an entity’s allowance for credit losses based on their own expectations. In the lead-up to the financial crisis, users were making estimates of expected credit losses and devaluing financial institutions before accounting losses were recognized, highlighting the differing information needs of users from what was required by U.S GAAP. Similarly, financial institutions expressed frustration during this period because they could not record credit losses that they were expecting but had not yet met the probable threshold.

Current CECL Model

The current expected credit loss (CECL) model requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Forward-looking information will be used to generate credit loss estimates.

Financial Assets held at Amortized Cost

A financial asset measured at amortized cost basis should be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset.

At each reporting date, an allowance for credit losses should be recorded. The amount necessary to adjust the allowance for credit losses for management’s current estimate of expected credit losses on financial asset(s) should be reported in net income as a credit loss expense.

This applies to the following:

  • Financing receivables
  • Held-to-maturity debt securities
  • Receivables that result from revenue transactions
  • Receivables that relate to repurchase agreements and securities lending

Developing an Estimate

The allowance for credit losses may be determined using various methods. For example, discounted cash flow methods, loss-rate methods, roll-rate methods, probability-of-default methods, or methods that utilize an aging schedule may be used.

Available-for Sale Debt Securities

The CECL model does not apply to investments in available-for-sale debt securities. The FASB concluded that a different model was necessary because the unit of account for available-for-sale debt securities is the individual security and the total value of the security may be realized through the collection of cash flows or through the sale of the security. When the fair value of an investment is less than its amortized cost basis, the investment is impaired.

In assessing whether a credit loss exists, the present value of cash flows expected to be collected from the security should be compared with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, a credit loss exists and an allowance for credit losses should be recorded for the credit loss (limited by the amount that the fair value is less than amortized cost basis). Credit losses on an impaired security should continue to be measured using the present value of expected future cash flows.

Credit losses should be presented as an allowance rather than as a write-down. Under this approach, reversals of credit losses (in situations in which the estimate of credit losses declines) are recorded in current period net income.


The current CECL model includes a significant amount of additional guidance. The information included above is only a summary of a portion of that guidance. Please reach out to your Larson CPA for additional information and how this guidance may impact your organization.