Credit Loss Recognition: New Reporting

Accounting Standard Update 2016-13 changes the requirements to recognize credit loss by introducing the current expected credit loss method that replaces a loss impairment methodology. Furthermore, it introduced a new term called purchased credit deteriorated financial asset. The new recognition makes major improvements to record credit losses on available-for-sale debt securities. The new reporting model brings both challenges and opportunities with the new credit loss model. This new standard requires a financial institution to recognize allowance for credit losses that are expected resulting in greater reserves for credit loss. One of the many unanswered questions is how the new reporting method affect capital requirements. This paper explores the reporting method's processes and applications as well as its advantages. Future research will determine whether this new recognition method is more effective and cost beneficial than earlier reporting methods in recognizing credit losses.