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Big Banks Didn’t See Benefit of Deferring Adoption of Credit Loss Accounting Rules

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

By Denise Lugo

The nation’s largest banks adopted the FASB’s current expected credit loss (CECL) standard this year, as opposed to taking the legislative delay under the coronavirus economic relief package, because they did not see the benefit of delaying the inevitable, according to joint educational discussions by U.S. and international accounting rulemakers on November 19, 2020.

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, banks and other companies do not have to adopt the CECL standard this year, but they would have had to start applying it next year, and do so as if they adopted it at the start of 2020, the effective date of the standard, FASB Technical Director Hillary Salo said during talks with the IASB. “So for many banks, they didn’t necessarily see the significant benefit of it depending on where they were from an implementation perspective,” she said.

The FASB published the standard in 2016 as Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to require companies to provide a more timely report of the losses they expect to incur from soured loans.

The rules were developed in response to the 2008 global financial crisis, after market watchers said prior accounting provisions provided too little information too late to investors about the losses banks in particular expected.

Coincidentally, the CECL standard took effect on January 1, 2020, just three months before the COVID-19 pandemic began, which sparked another economic crisis that is still ongoing. Smaller public companies, private companies, and not-for-profit organizations have until 2023 to apply the changes.

80 Percent of Financial System Applied CECL

About 40 smaller banks took the CARES Act deferral of CECL, a smaller slice of the broader financial market, FASB Chairman Richard Jones and Board member Harold Schroeder told the joint meeting.

Schroeder stated that there are over ten thousand institutions in the U.S. financial system, and the way the FASB designed the standard means it only applies to less than 2 percent of the ten thousand. “In the entire financial services, 80 percent of the assets were applying CECL this year, even though it’s less than 200 banks in total,” he said.

The FASB a few months ago placed the CECL standard under post-implementation review (PIR), its process for examining a major new accounting standard to determine whether it worked as intended. The board has said it would discuss the findings of the PIR in December.

So far, feedback from financial statement users regarding the information banks are providing from applying the CECL standard has been positive, according to the discussions. FASB member Christine Botosan told the meeting it will be interesting to watch whether the market will pressure those banks that did not apply the rules according to the GAAP effective date, due to information investors are not getting.

“There was one phone call that I was involved in where the user that had said he was very strongly against CECL before it was issued, now was a strong advocate because of the information they were receiving to help them understand what they believed about their ability to collect the balances that were owed to them,” said Botosan.

“I think one of the things that’ll be interesting to watch is the extent to which there will be market pressure on those banks that chose not to go forward with CECL according to the effective date requirements, but took the congressional deferral,” she said. “Because I think they’re probably going to be getting questions from their investors to help them understand the information that they’re not receiving as a result of the entities’ decisions to defer the application of CECL.”

IASB Studying Disclosures on Related IFRS

In response to Botosan, IASB Vice Chair Sue Lloyd said that board is studying the disclosures that have come up on the expected credit loss (ECL) front for international financial reporting standards (IFRS), and therefore decided not to start its PIR on impairment rules under IFRS 9Financial Instruments.

“And one of the reasons for that is that we really want to have time to look at what the disclosures looked like – whether they worked for investors or not,” Lloyd said. “And also we know it’s management’s estimates so we don’t expect things to be directly comparable but our objective was to have enough information that people were able to have a basis for making comparisons and that’s something we really want to understand more as time goes by.”

The IASB on November 18 announced it started a PIR on the classification and measurement portion of IFRS 9 only. (See IASB Launches Review of Rules for Classifying and Measuring Financial Instruments in the November 20, 2020 edition of Accounting & Compliance Alert.)


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