Reviewing the Current Expected Credit Losses (CECL) In Healthcare

As a response to recent financial crises that occurred in the U.S., the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13 – Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Subtopic 326-20 of the ASU sets forth the Current Expected Credit Loss (CECL) model that applies to financial assets held at amortized cost basis, and Subtopic 326-30 amended the impairment model for available-for-sale (AFS) debt securities. The FASB believes that adopting this ASU will result in more timely recognition of expected credit losses.

The amended credit losses model for AFS debt securities, under FASB Accounting Standard Codification (ASC) Subtopic 326-30 requires an allowance for credit losses (and potentially direct write-off) if the AFS debt securities’ fair value is less than amortized cost and there are indications that credit losses are present. This model replaces the prior other-than-temporary impairment accounting model. This article will not go into depth on this part of ASC 326, as the implications are industry agnostic and dependent upon an organization’s investment holdings. Organizations that hold AFS debt securities should familiarize themselves with the guidance under ASC Subtopic 326-30 in order to evaluate the impact this change might have on their accounting and financial presentation. For example, the potential impact to the financial statement presentation of unrealized losses in the “other changes in net assets” section of a not-for-profit (NFP) entity’s statement of operations and changes in net assets.

The focus of this article will be on the implementation of the CECL model under ASC Subtopic 326-20 (financial assets held at amortized cost basis) within the healthcare industry.