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U.S. Accounting Rulemakers Faced with Tough Decisions over Credit Loss Rules

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

By Denise Lugo

The FASB will vote on October 16, 2019, about whether to finalize an August proposal that aims to delay credit loss rules for only a subset of companies, an issue that has raised the ire of banking groups and U.S. legislators who are pushing for an indefinite deferral until further study is performed on the changes.

Banking groups and legislators do not believe the FASB’s prior extensive efforts to vet the rules are enough.

The credit loss rules, which take effect next year for large public companies, require banks to forecast into the foreseeable future to predict losses over the life of a loan, and then immediately book those losses. The rules were issued in response to the 2007-2008 global financial crisis, the biggest financial meltdown since the Great Depression.

The board’s forthcoming vote is to determine whether to finalize Proposed Accounting Standards Update (ASU) No. 2019-750, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates , which was issued to defer the rules for smaller companies and private companies until 2023. (See FASB Plans to Vote Mid-October on Proposed Effective Date Deferrals in the September 25, 2019, edition of Accounting & Compliance Alert.)

The American Bankers Association, the voice of the nation’s $18 trillion banking industry, told the board that the credit loss standard should be deferred indefinitely for all companies, until a quantifying impact study can be performed that uses “expected bank practice, in light of regulatory supervision and auditing constructs. Regulator support can be reassessed at that time”.

U.S. legislators have also taken up the topic, pushing for a bill that would force the FASB to re-do all of the prior due diligence it has already performed. Rep. Blaine Luetkemeyer on September 27 introduced legislation that would subject the FASB’s actions to additional checks under the Administrative Procedure Act. H.R. 4565, the Responsible Accounting Standards Act, would “abide by the same rulemaking guidelines in place for every federal financial regulator, including the Federal Reserve.” (See GOP Bill Would Subject FASB Standard-Setting to Additional Checks in the October 1, 2019, edition of Accounting & Compliance Alert).

In its outreach to develop and vet the rules, the FASB said it held 25 field work meetings with financial statement preparers from banking institutions of various sizes, nonfinancial companies and insurance companies. The board held 10 roundtables with more than 100 representatives including financial statement users, preparers, regulators and auditors. It held 85 meetings and work shops, and met with 200 financial statement users. When it issued a proposal in 2010 to change the rules, the board received 3,360 comment letters.

FASB’s Trustees Stressed to Congress the Importance of an Independent Standard-Setting Process

Earlier this year, Trustees of the Financial Accounting Foundation, the body with oversight of the FASB, said it held multiple meetings with Congress to stress the importance of an independent U.S. standard-setting process free of political interference, a topic that has been talked about in accounting circles for decades with limited results. Trustees held 29 meetings on the Hill plus a dinner on May 21 with over 100 guests.

Most companies have generally welcomed the deferral as is, a sampling of the 98 comment letters FASB received indicates. Credit unions, banks, banking groups, trade organizations, accounting firms, and many others submitted comments, the board’s website revealed.

Proposed (ASU) No. 2019-750 also applies to lease and hedge accounting rules. It would defer the effective date of credit loss rules from 2020 to 2023 for small reporting companies (SRCs) as defined by the SEC, and from 2021 to 2023 for private companies and not-for-profit organizations. It would also delay hedging and leases rules from 2020 to 2021 for private companies and nonprofits.

The board will also separately vote on deferring accounting rules for long-term insurance contracts, an effort met with unanimous support by the insurance sector. Proposed ASU No. 2019-760 would delay the rules for reporting long-term insurance contracts from 2021 to 2022 for public companies, from 2021 to 2024 for SRCs and from 2022 to 2024 for private companies and nonprofits.

Separately, the board will continue discussions on a narrow hedge accounting topic to provide clarify around the last-of-layer method, a new accounting technique introduced under the hedging rules, according to its October 10 agenda. The board plans to continue hammering at issues related to accounting for multiple-layer hedging strategies and fair value hedge basis adjustments within the last-of-layer method.

For in-depth analysis of the FASB’s guidance for credit losses, please see Catalyst: US GAAP—Financial Instruments-Impairment, also on Checkpoint.

Additional analysis of the credit loss standard can be found at Accounting and Auditing Update Service [AAUS] No. 2016-29 and SEC Accounting and Reporting Update Service [SARU] No. 2016-34 (July 2016): Special Report: Accounting for Credit Losses on Certain Financial Assets—An Explanation and Analysis of Accounting Standards Update No. 2016-13.


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