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Current Expected Credit Loss Accounting [Video]

Current Expected Credit Loss Accounting

The FASB issued an accounting standard update (ASU 2016-13) on current expected credit losses (CECL) on June 16, 2016. Prior to this update, companies reported credit losses only when it was probable a loss had been incurred.

This “incurred loss method” became a problem during the 2008 financial crisis. Banks weren’t recognizing losses fast enough, as GAAP didn’t allow them to consider future developments. Thus, in spite of a bleak economic outlook, loan loss reserves weren’t being adjusted to account for the future expected losses.

Under the new CECL method, companies must incorporate information from forward-looking forecasts to estimate credit losses over the entire contractual life of the asset. In short, banks and other companies must now forecast future economic conditions and record expected credit losses. We are therefore shifting from an incurred-loss model to an expected-loss model, and this is intended to accelerate the recognition of impairments.

Now this accounting rule doesn’t just apply to banks. It applies to companies holding any of the following financial assets:
• Trade receivables
• Lease receivables from a sales-type or direct-financing lease
• Reinsurance receivables
• Receivables related to repurchase agreements
• Loans held for investment
• Held-to-maturity debt securities carried at amortized cost
• Some off balance sheet credit exposures like loan commitments and financial guarantees

Note that the CECL rules do NOT apply to:
• Loans held for sale
• Trading assets
• Financial assets for which the company has elected the fair value option
• Loans or receivables between entities under common control

So let’s talk about the journal entry that a company would record. If a company expects to have a future credit loss, it would:
• Record credit loss expense
• Record a credit loss allowance. The allowance account is a contra asset; you don’t reduce the asset directly

Credit loss expense 500
Allowance for expected credit losses 500

If circumstances later change and the company doesn’t believe it will have a credit loss, the company can simply reverse the entry. In any case, the balance sheet shows the net amount the company expects to collect. In rare cases, recognizing zero credit losses might be appropriate

So, how should a company measure the allowance?

The FASB didn’t mandate a specific method. Companies could use:
• Discounted cash flow methods
• Probability-of-default methods
• Loss-rate methods
• Roll-rate methods
• An aging schedule

It’s up to each company to develop its own estimation model. If a company has financial assets with similar risk characteristics (asset type, term, credit ratings, geography) it can pool those assets and evaluate them on a collective basis, and if the company ultimately finds that a financial asset is uncollectible, it should write the account off:

Allowance for expected credit losses 500
Financial asset 500

Now if you’re wondering about the international accounting rules:
The IASB adopted a similar credit loss model in 2014 (IFRS 9), so companies outside the U.S. also need to estimate future expected credit losses. However, there are differences between the international rules and U.S. rules, so make sure to refer to IFRS 9 if your company follows IFRS

Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education accessible to all people.

SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS:
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• A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS
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* https://edspira.thinkific.com

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ABOUT EDSPIRA AND ITS CREATOR
* https://www.edspira.com/about/

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Resources for Accountants

Accountant or Bookkeeper? Which Role Is Right for You [Video]

Become a Controller; enroll in the Controller Academy 🚀 https://controller-academy.com/courses/controller-academy This video will be your ultimate guide on the differences But more importantly, I am gonna focus on how you can make high 6 figures with either of these 2 professions So here is our agenda: we'll take a look at the Job responsibilities of both the bookkeeper and the accountant We'll talk about the education requirements And then, I'll tell you How you can earn high 6 figures regardless of whether you chose to be a bookkeeper or an Accountant Time Stamps: 00:00 Intro 00:27 Agenda 00:46 1. Job Responsibilities 02:23 2. Education Requirements 04:07 3. How Accountants Make $100K plus 06:37 4. How Bookkeepers Make $100K plus ----------------------------------- Hang Out with me on social media: 📸 https://www.instagram.com/the_financial_controller/ 📱https://www.tiktok.com/@thefinancialcontroller https://www.linkedin.com/in/bill-hanna-cpa-7653a851/ DISCLAIMER: Links included in this description might be affiliate links. If you happen to purchase a product or service with the links that I provide I may receive a small commission. There is no additional charge to you! Thank you for supporting my channel so I can continue to provide you with free content each week! All views expressed on my channel are mine alone. Not intended as financial or professional advice

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Resources for Accountants

IFRS 16 vs ASC 842 [Video]

ASC 842 is the section of the U.S. accounting rules codification that governs accounting for leases. ASC 842 was issued in February of 201640 and has many similarities to IFRS 16. For example, both ASC 842 and IFRS 16 require lessees to capitalize leases with a lease term of more than one year. However, there are several key differences between ASC 842 and IFRS 16. These differences mainly pertain to the lessee’s perspective. The most significant difference is that ASC 842 requires lessees to conduct a classification test to determine whether a lease will be treated as a finance lease or an operating lease. If the lease is classified as an operating lease, the lessee recognizes both interest expense on the lease liability and amortization expense on the right-of-use asset. However, the lessee amortizes the right-of-use asset in such a way that total lease expense is the same for each period. In short, the lessee first calculates interest expense and then calculates amortization expense as the plug that will make total lease expense the same amount each period. Thus, lessees report a single amount for lease expense that is the same from period to period. Another important difference is that ASC 842 doesn’t has an exception for leases of low-value assets. Recall that IFRS 16 requires lessees to capitalize all leases, except (a) short-term leases of 12 months or less and (b) leases of assets that have a value of $5,000 or less. With ASC 842, the exception is only available for short-term leases of 12 months or less. For lessors, ASC 842 relies on quantitative criteria to determine whether a lease should be classified as a finance lease or an operating lease. IFRS 16 says this determination should be based on the substance of the transaction.— Edspira is the creation of Michael McLaughlin, who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education accessible to all people.— SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS* http://eepurl.com/dIaa5z— LISTEN TO THE SCHEME PODCAST* Apple Podcasts: https://podcasts.apple.com/us/podcast/scheme/id1522352725* Spotify: https://open.spotify.com/show/4WaNTqVFxISHlgcSWNT1kc* Website: https://www.edspira.com/podcast-2/ — CONNECT WITH EDSPIRA* Website: https://www.edspira.com* Blog: https://www.edspira.com/blog/ * Facebook page: https://www.facebook.com/Edspira* Facebook group: https://www.facebook.com/groups/561316587899818//* Reddit: https://www.reddit.com/r/edspira* LinkedIn: https://www.linkedin.com/company/edspira— CONNECT WITH MICHAEL* Website: http://www.MichaelMcLaughlin.com* LinkedIn: https://www.linkedin.com/in/prof-michael-mclaughlin * Twitter: https://www.twitter.com/Prof_McLaughlin* Facebook: https://www.facebook.com/prof.michael.mclaughlin* Snapchat: https://www.snapchat.com/add/prof_mclaughlin*Twitch: https://twitch.tv/prof_mclaughlin * Instagram: https://www.instagram.com/prof_mclaughlin*TikTok: https://www.tiktok.com/@prof_mclaughlin

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Resources for Accountants

The Difference between a Top-tier and a Low-tier Business School [Video]

I’ve taught at several different business schools, and I’ve found that both higher-tier and lower-tier business schools teach the same business concepts. You’ll learn about Porter’s Five Forces, the four P’s of marketing, and the financial statements. So if you’re learning the same concepts, why do some people try so hard to get into a top business school? I mean, why does it matter where you go to school? It matters because classroom learning is just one aspect of the business school experience. What you get out of business school is also a function of: • The quality of the school’s alumni network and faculty, as well as your classmates • The helpfulness of the school’s career center • The reputation of the school and its ability to become a recruiting target for top firms — Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education freely available to the world. — SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS: • A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING • A 44-PAGE GUIDE TO U.S. TAXATION • A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS • MANY MORE FREE PDF GUIDES AND SPREADSHEETS * http://eepurl.com/dIaa5z — SUPPORT EDSPIRA ON PATREON *https://www.patreon.com/prof_mclaughlin — GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT * https://edspira.thinkific.com — LISTEN TO THE SCHEME PODCAST * Apple Podcasts: https://podcasts.apple.com/us/podcast/scheme/id1522352725 * Spotify: https://open.spotify.com/show/4WaNTqVFxISHlgcSWNT1kc * Website: https://www.edspira.com/podcast-2/ — GET TAX TIPS ON TIKTOK * https://www.tiktok.com/@prof_mclaughlin — ACCESS INDEX OF VIDEOS * https://www.edspira.com/index — CONNECT WITH EDSPIRA * Facebook: https://www.facebook.com/Edspira * Instagram: https://www.instagram.com/edspiradotcom * LinkedIn: https://www.linkedin.com/company/edspira — CONNECT WITH MICHAEL * Twitter: https://www.twitter.com/Prof_McLaughlin * LinkedIn: https://www.linkedin.com/in/prof-michael-mclaughlin — ABOUT EDSPIRA AND ITS CREATOR * https://www.edspira.com/about/ * https://michaelmclaughlin.com