Financial Instruments—Credit Losses

ASC 326 (Credit Losses) tells an entity how to measure expected credit losses on financial instruments through three subtopics: 326-10 Overall (purpose, scope for all entities, and the Section 65 transition/effective-date guidance, including ASU 2025-05 on accounts receivable and contract assets and ASU 2025-08 on purchased loans), 326-20 the CECL model for assets measured at amortized cost, and 326-30 impairment of available-for-sale debt securities. Under 326-20, an entity records at each reporting date an allowance—a valuation account deducted from amortized cost—equal to all credit losses expected over the contractual term, estimated on a pool basis when assets share similar risk characteristics, using historical loss experience adjusted for current conditions and reasonable and supportable forecasts with reversion to historical information thereafter (326-20-30-1, 30-2, 30-6, 30-8 through 30-9). Under 326-30, impairment is instead assessed security by security: the credit portion of a decline below amortized cost (present value of expected cash flows discounted at the effective interest rate versus amortized cost) is recorded as an allowance capped at the fair value shortfall, the rest goes to OCI, and an intent or likely requirement to sell triggers a write-down to fair value through earnings (326-30-35-1, 35-6, 35-10). The unifying idea is that credit losses are recognized currently and forward-lookingly through an allowance that presents the net amount expected to be collected, rather than only when losses are incurred.

Subtopics

1. 10Overall11 ¶

   ASC 326-10 is the Overall subtopic of the credit losses Topic: it states the Topic's purpose (how an entity measures credit losses on financial instruments), identifies its three subtopics (Overall; Measured at Amortized Cost; Available-for-Sale Debt Securities), and applies to all entities. Its substantive content today is largely scope plus the transition/effective-date paragraphs in Section 65 for recent ASUs, since the CECL-adoption transition paragraphs from ASU 2016-13 and related updates were superseded on 06/21/2024 once the transition period ended.

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2. 20Measured at Amortized Cost192 ¶

   ASC 326-20 is the CECL (current expected credit loss) model for financial assets measured at amortized cost, net investments in leases, off-balance-sheet credit exposures, and reinsurance recoverables. At every reporting date an entity records an allowance (a valuation account deducted from amortized cost) equal to management's current estimate of all credit losses expected over the contractual term, based on past events, current conditions, and reasonable and supportable forecasts, with a reversion to historical loss information beyond the forecastable period (326-20-30-1, 30-6, 30-9). Assets are pooled when they share similar risk characteristics and evaluated individually only when they do not (326-20-30-2).

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3. 30Available-for-Sale Debt Securities56 ¶

   ASC 326-30 governs measurement of credit losses on debt securities classified as available-for-sale (AFS), including loans meeting the definition of debt securities classified as AFS. Unlike the pooled CECL model in 326-20, impairment is assessed at the individual security level: when fair value is below amortized cost, the entity determines how much of the decline is credit-related by comparing the present value of expected cash flows with amortized cost, records that amount as an allowance for credit losses (capped at the amount fair value is below amortized cost), and puts the remaining decline in other comprehensive income. If the entity intends to sell or more likely than not must sell before recovery, the allowance is written off and the security is written down to fair value through earnings.

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