Insights

When made effective for public and non-public business entities, the adoption of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), also known as the CECL standard, represented a major shift in U.S. GAAP. This update replaced the traditional "incurred loss" model with a more forward-looking approach, requiring companies to estimate expected credit losses over the life of applicable financial assets. While the intent is to improve the timeliness and accuracy of credit loss recognition, its impact—and whether it applies at all—depends heavily on the nature of your organization’s financial instruments.

This month, we are visiting the topic of ASU 326, and potential scope exceptions available for entities and lessors, with operating leases being evaluated for CECL impact. As noted in this month's Blog, BGSF’s Business Consulting & Financial Risk Advisory team can help organizations assess whether CECL applies to them and, if it does, how to implement it effectively. In this post, we explore the key considerations around the scope of ASU 326, using real-world examples and insights from recent client assessments.

What Does ASU 326 Cover?

Under ASC 326-20-15-2, the CECL model applies to financial assets measured at amortized cost, including:

• Loans and trade receivables

• Held-to-maturity (HTM) debt securities

• Net investments in leases (for lessors)

• Reinsurance recoverables

• Receivables arising from revenue contracts under ASC 606

• Off-balance-sheet credit exposures, such as unused lines of credit

The model requires recognition of expected credit losses using a combination of historical experience, current conditions, and reasonable and supportable forecasts.

What’s Not in Scope? The Leases Exception

One common area of confusion arises with operating lease receivables, which are not subject to ASC 326. Instead, these fall under ASC 842, leases, which retain an incurred loss model rather than a forward-looking CECL approach.

Under ASU 326-20-15-3, this subtopic does not apply to the following items:

• Financial assets measured at fair value through net income

• Available-for-sale debt securities

• Loans made to participants by defined-contribution employee benefit plans

• Policy loan receivables of an insurance entity

• Promises to give (pledges receivable) of a not-for-profit entity

• Loans and receivables between entities under common control.

• Receivables arising from operating leases accounted for in accordance with Topic 842.

These distinctions are critical for companies to assess. Particularly, this month we examine the implications for property management, real estate companies, asset managers, and lessors generating revenue through operating leases. Specifically, we are highlighting ASC 326-20-15-3(g) above; “Receivables arising from operating leases accounted for in accordance with Topic 842."

Beyond looking at the exceptions noted above, companies must also look at the practical expedients provided by ASC of relevant guidance. In the case noted below, ASC 842-10-15-42A provided a practical expedient that allows a company to combine lease and nonlease components (like utilities or maintenance services) into a single lease component, provided:

• The pattern of transfer is the same (e.g., revenue recognized evenly over time), and

• The lease component would qualify as an operating lease on its own.

When used appropriately, this expedient can significantly reduce the complexity and reporting burden associated with applying ASC 326.

Case Insight: Analyzing Financial Instruments for CECL Applicability

In a recent client engagement, we helped a company assess the applicability of CECL across its revenue streams and financial assets. The company’s income consisted primarily of:

• Rental income from operating leases

• Advisory and management fees tied to lease agreements

• Nonlease charges like utilities, tenant improvements, and shared services

After a thorough review, we determined:

• These revenue streams were consistent with the ASC 842 lease model

• The practical expedient was applicable due to the similar transfer pattern between lease and nonlease components

• As a result, the over 95% receivables fell outside the scope of ASC 326

Only a small portion of “Other receivables” fell under ASC 326, representing less than 3% of total receivables. These were ultimately deemed immaterial and reduced the level of work to be performed on these receivables relative to initially planned audit procedures.

Why This Matters for Your Business

Whether you're in real estate, asset management, or another sector that deals with leases or recurring services, you may not be materially impacted by CECL, but that doesn't mean you can skip the analysis.

Failing to appropriately identify what's in and out of scope could result in:

• Unnecessary complexity in your financial reporting

• Overstatement or understatement of credit loss reserves

• Audit scrutiny over misapplied accounting standards

For many companies, this analysis requires cross-functional collaboration between accounting, finance, legal, and operations. It also demands a deep understanding of GAAP scope exceptions, which is where expert guidance can make a difference.

How We Can Help

At BGSF, we have experience in helping businesses:

• Evaluate the scope of ASU 326 as it relates to leases, receivables, and off-balance-sheet exposures

• Apply practical expedients under ASC 842 to simplify compliance

• Design credit loss models where CECL is applicable, including pooled and specific identification methods

• Develop documentation and controls to support audits and financial reporting

Whether your organization is newly implementing CECL or conducting a post-adoption assessment, we can help ensure you're aligned with both the technical guidance and strategic objectives of your business.

Final Thoughts

ASU 326 is a powerful reminder that technical accounting decisions are highly contextual. For executives, it’s essential to understand how these rules intersect with your company’s operational structure, especially when exceptions, like those for operating leases, could significantly reduce your compliance burden. 

If you're unsure about how CECL applies to your business or want to explore whether practical expedients could simplify your reporting, we’re here to help.

Need a CECL Scope Assessment?

Schedule a consultation to review your financial instruments and identify how ASU 326 may (or may not) apply to your organization: BGSF Business Consulting & Financial Risk Advisory and let’s discuss how BGSF can help you.