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CPA Exam FAR Changes for 2020-Available for Sale Debt Securities-Credit Loss Reporting.

The AICPA is implementing some changes to the FAR exam in January of 2020. Accounting for Credit Losses has changed from an already incurred model to a “current expected” credit loss model. The new model, nicknamed CECL, estimates expected credit losses over the lifetime of the asset. The new CECL model will reflect economic downturns in the financial statements faster which means earlier recognition of credit loss expense in the income statement. The CECL model will impact the accounting for unrealized losses on Available for Sale Debt Securities when the decline in fair value is the result of credit deterioration of the issuer. Assuming no credit deterioration, just a market decline, unrealized losses on Available for sale debt securities are still recorded in Other comprehensive income, OCI. However, and here is the change for the CPA candidate in 2020, if the unrealized loss on “available for sale debt securities” is due to credit deterioration of the issuing investee, that portion of the unrealized loss is shown in earnings which means on the income statement. The amount of unrealized loss due to credit deterioration is debited to an account called “credit loss expense” and a credit to “allowance for credit loss” which is a contra asset. This loss can be reversed if circumstances change in a later period. Should circumstances reverse in a later period, the “credit loss expense” would be credited and the contra account, “allowance for credit loss” would be debited. The only other time to debit “allowance for credit loss” would be for an actual write-off of a worthless investment. If an investment in available for sale debt securities is considered worthless then any allowance would be debited for the amount that was previously credited and a credit would be made to investment in debt securities. Note that the write-off the worthless investment would not involve the income statement, only the balance sheet. This is very similar to a write off a an account receivable.

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