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Existing Loan Loss Guidance to Remain Useful for Implementing FASB’s Credit Loss Standard

SEC Chief Accountant Wesley Bricker said the SEC’s existing guidance for loan loss accounting will remain useful for banks implementing the FASB’s new credit loss standard. The market regulator plans to continue monitoring banks’ progress implementing the standard and evaluating the decisions banks make for setting aside reserves.

SEC Chief Accountant Wesley Bricker said banks should look to the market regulator’s existing guidance as they prepare to implement the FASB’s standard for loan loss accounting.

Accounting Standards Update (ASU) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, was published in June 2016 and is scheduled to go into effect in 2020. In the 15 months since the standard was issued, Bricker and his staff in the Office of the Chief Accountant (OCA) have been monitoring the banking industry’s progress making the transition to the standard and evaluating the issues banks encounter.

“OCA will continue to respect well-reasoned practice judgments that are grounded in the new standard that are consistent with commission’s requirements and SEC staff guidance,” Bricker said in a September 11, 2017, speech at the AICPA’s National Conference on Banks & Savings Institutions in National Harbor, Maryland. He cited the importance of the existing staff guidance for implementing the credit loss standard, which he has done previously.

Bricker said Financial Reporting Release (FRR) No. 28, Accounting for Loan Losses by Registrants Engaged in Lending Activities, and Staff Accounting Bulletin (SAB) No. 102 (original) — July 6, 2001, Selected Loan Loss Allowance Methodology and Documentation Issues, (SAB Topic 6-L), provide financial reporting professionals with a good framework for the accounting changes they will have to implement from ASU No. 2016-13. Banks have used the SEC guidance to establish procedures for identifying and documenting the information they expect to use for calculating the losses they anticipate from their loan portfolios. For example, he said the systematic methodology and documentation practices in FRR 28 and SAB 102 will continue to apply when determining the allowance for losses.

ASU No. 2016-13 requires banks to write down loans as they are going bad and set aside reserves to cover the losses they expect on their financial instruments through a model called “current expected credit losses” (CECL). The standard is replacing the “incurred loss” model that requires banks to mark down loans after borrowers have fallen behind on payments.

Bricker said banks’ implementation of the new standard should include a thorough evaluation of their internal controls for financial reporting (ICFR) to make any necessary changes.

“Well-designed ICFR supports the process by which necessary accounting judgments are made,” Bricker said, adding that banks’ senior executives are responsible for ensuring that employees do not try to override the controls.

“Appropriate tone at the top is the foundation for the consistent application of the sound judgments required by the new standard,” he said. “Management should consider whether changes to support the formation of sound judgments are needed in applying the new standard.”

He also said that banks will need to document the decisions they make about loss reserves, and that sound financial reporting controls will help them produce reliable documentation.

“Documentation can facilitate the retention or transfer of knowledge useful in resolving discussions more quickly related to things like the identification and assessment of risks, control design, testing strategy, and evaluation of deficiencies,” he said.