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Credit Unions Ask for Second Draft of Planned Loan-Loss Standard

The National Association of Federal Credit Unions called on the FASB to delay publication of its forthcoming standard to require earlier recognition of loan losses. In a letter to the standard-setter, the group said the FASB needs to release another draft version of the planned standard for a second round of comments instead of publishing the final guidance this year.

The National Association of Federal Credit Unions on February 11, 2016, called on the FASB to halt the publication of its planned loan losses standard and instead issue an updated proposal for another round of public comments.

Such a move would delay a much-watched — and unpopular — accounting standard that the FASB is on track to complete this year. The forthcoming accounting standard is considered the standard-setter’s most important response to the 2008 financial crisis.

The letter echoed requests at a public roundtable between bankers and the FASB on February 4. During a heated debate, representatives from community banks and credit unions told the FASB that the forthcoming standard will be too difficult and too costly for small financial institutions to follow. They also said their lending practices were not at the root of the financial crisis and should not be subjected to the same scrutiny as the loan portfolios of the nation’s largest banks.

FASB officials and regulators have tried to ease depository institutions’ fears, saying the forthcoming standard will be an improvement over current accounting, and banks and credit unions will be able to leverage existing practice to apply the new requirements. Regulators at the federal banking agencies are reluctant to see another proposal published because such a move would delay the standard’s publication by about two years, given the need to review the comment letters that are submitted. In their view, the standard is far behind schedule, its provisions have been extensively debated, and the requirements, although they are not yet public, are well understood. (See Regulators Try to Ease Bankers’ Fears About FASB’s Planned Loan-Loss Standard in the February 8, 2016, edition of Accounting & Compliance Alert .)

“NAFCU believes that issuing an updated exposure draft would not only benefit credit unions but also allow all stakeholders a chance to provide their perspectives on an accounting standard that will inevitably cause significant expenditure of costs and resources,” the letter reads. “The entire industry deserves every available opportunity to find an appropriate balance between the costs to institutions and the benefits to financial instrument reporting.”

The FASB does not respond publicly to individual letters.

“We have received the February 11 letter from NAFCU on the FASB’s upcoming credit losses standard and will consider it as we do all comment letters,” a FASB spokeswoman said.

The spokeswoman confirmed that the FASB plans to publish the standard by midyear. The board has one more meeting scheduled before publication of the standard at which it expects to cover the expected costs of the standard and its projected benefits. The upcoming discussion is likely to be one of the final steps in the FASB’s due process before publishing an accounting standard.

In its letter, the credit union group says the FASB needs more time to weigh feedback from credit unions and other banks and to make “substantial” changes. It also expressed concerns that during the February 4 roundtable discussion, FASB members said the board made several changes between the December 2012 release of Proposed Accounting Standard Update (ASU) No. 2012-260, Financial Instruments—Credit Losses (Subtopic 825-15), and the expected publication of the forthcoming standard.

“In fact, on several instances during the public meeting, board members deflected industry concerns as the product of not having seen the current unreleased draft of the ASU,” the letter reads.

If the changes are indeed substantive, the FASB needs to offer the public another opportunity to respond to them, the group wrote.

“Since many changes to the ASU have clearly occurred and would likely be considered substantive under the APA, NAFCU believes that the FASB should voluntarily follow the example of federal regulators and reissue an updated exposure draft for public comment,” the letter reads in a reference to the Administrative Procedure Act.

The FASB’s credit losses standard has faced harsh criticism since the board started working on it. Under the planned standard, banks must look to the foreseeable future, consider all losses that could happen to the loan, trade receivable, or security in question, and immediately book losses.

The planned standard is a reaction to years of complaints by investors, analysts, and regulators that current accounting standards allow banks to record losses only after they are “probable,” which in practice means the losses have occurred. The delayed recognition of the losses made bank balance sheets appear healthy even when the mortgage market was collapsing, investors were shunning the securitized assets backed by mortgages, and bank stocks were in a free fall.

During the roundtable, FASB members said that long before they began work on the standard, they had received complaints from banks about the shortcomings of the existing incurred-loss model that forces them to wait to recognize a loss until a borrower falls behind on payments. The bankers asked the accounting board to adopt an accounting model that allowed them to book losses earlier in the credit cycle.

The forthcoming standard requires estimates about future losses, but the FASB plans to avoid prescribing specific methods for making the estimates. Large banks say the standard will require costly and complex tools to implement, auditors say they are concerned about how to check banks’ estimates, and thousands of small community banks have sent letters to the FASB asking that the requirements be scaled back for them.

In December, FASB Chairman Russell Golden said in a speech in Washington that because 160 community banks failed during the financial crisis, the board would not consider peeling back requirements or making exceptions. The FASB has agreed, however, that small banks will have extra time to implement the standard once it goes into effect.

Community bank organizations have asked the FASB to consider a scaled-down version of the model for smaller financial institutions. Instead of recording loan losses as soon as they write a loan, they would estimate losses based on historical experience for identical or similar assets. Banks would record losses and boost reserves based on expectations, but they would not have to use complex models to do so. The FASB has made no commitment to considering this avenue.

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