Credit impairment for short-term receivables under ASC 326

ASC 326 applies to all entities and provides guidance on the following topics: • The CECL impairment model (ASC 326-20) for financial assets measured at amortized cost, net investments in leases, reinsurance receivables accounted for under ASC 944 and off-balance-sheet credit exposures not accounted for as insurance. • The available-for-sale (AFS) debt security impairment model (ASC 326-30) • The initial recognition of what are called purchased financial assets with evidence of credit deterioration or PCD assets • The impairment of beneficial interests in securitized financial assets in the scope of ASC 325-40

The CECL model also applies to certain financial assets not measured at amortized cost, such as receivables held by investment companies that are measured at net realizable value and reinsurance receivables. The FASB clarified that all reinsurance receivables accounted for under ASC 944 are in the scope of ASC 326, including those measured on a discounted basis.

In addition, ASC 606-10-45-3 states that contract assets should be assessed for impairment in accordance with ASC 326-20.

The guidance in this Subtopic does not apply to the following items: a. Financial assets measured at fair value through net income b. Available-for-sale debt securities c. Loans made to participants by defined contribution employee benefit plans d. Policy loan receivables of an insurance entity e. Promises to give (pledges receivable) of a not-for-profit entity f. Loans and receivables between entities under common control. g. Receivables arising from operating leases accounted for in accordance with Topic 842.

The overarching principle of ASC 326-20 is that an entity will recognize an allowance for credit losses that results in the financial statements reflecting the net amount expected to be collected from the financial asset. The allowance is based on the asset's amortized cost. That is, it represents the portion of the receivable's amortized cost basis that an entity does not expect to collect due to credit over the receivable's contractual life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions. Expected losses related to risks other than credit risk, such as operational risk, dispute risk or legal risk, should not be included in the allowance for credit losses. 

ASC 326 requires an entity's estimate of expected credit losses to reflect available information that is relevant to assessing the collectibility of cash flows. That information should include historical loss information adjusted for current conditions and forecasts about future economic conditions that are reasonable and supportable. The guidance requires entities to revert to historical loss information when they can no longer develop a reasonable and supportable forecast. 

Credit risk is sometimes mitigated by guarantees, such as letters of credit, or insurance. When estimating credit losses, an entity considers the mitigating effects of credit enhancements that aren't freestanding but is prohibited from considering the credit risk mitigating effects of freestanding guarantees and insurance. If the credit enhancement is freestanding, an entity accounts for the credit enhancement as a separate asset. 

A write-off should be recorded when an entity concludes that all or a portion of a financial asset is no longer collectible, and a recovery should be recorded when it occurs.

ASC 326 requires an entity to provide information that allows users to understand the methods and key assumptions it used to develop its allowance for credit losses and the circumstances that caused any changes in those estimates in the period. The disclosures should allow a user to understand the key drivers for credit loss expense recognized in the current period. ASC 326 indicates that a user should also be able to compare multiple entities with similar portfolios of financial assets and understand why they reported or should report different estimates of credit loss expense. A key disclosure will be the assumptions the entity used to forecast future conditions and how these assumptions affected management's estimate of expected credit losses.