AICPA Audit and Accounting Guide: Credit Losses

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Understand the latest guidance on credit losses.

On June 16, 2016, FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to:

• Amend guidance on reporting credit losses for financial assets held at amortized cost and available-for-sale debt securities and
• Create FASB Accounting Standards Codification (ASC) 326, Financial Instruments — Credit Losses.

As a result of this ASU, the incurred loss impairment methodology was replaced with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

In light of these changes, this guide was developed to summarize key provisions of FASB ASC 326, including disclosures, and to address key accounting implementation issues and considerations in auditing the allowance for credit losses (ACL).

The following areas within the auditing process are highlighted:

• Obtaining an understanding of the entity
• Assessing the risks of material misstatement
• Identifying the controls relevant to the audit
• Designing an audit response
• Performing audit procedures
• Evaluating the audit results

This edition of the guide includes updates on:

• SAS No. 143, Auditing Accounting Estimates and Related Disclosures
• SAS No. 144, Amendments to AU-C Sections 501, 540, and 620 Related to the Use of Specialists and the Use of Pricing Information Obtained From External Information
• SAS No. 145, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement
• FASB ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments
• FASB ASU No. 2022-02, Financial Instruments — Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures

Key Topics

• Key accounting provisions of FASB ASC 326
• Key accounting implementation issues and interpretations
• Comprehensive coverage of audit considerations specific to the allowance for credit losses (ACL), including controls, audit risk and management estimates