By Denise Lugo
The economic stimulus package recently passed by U.S. legislators that allows large banks to suspend applying current expected credit loss (CECL) rules has generated financial reporting uncertainty in the U.S. marketplace because there are too many variables taking place at once, practitioners said.
Companies now expect the FASB, the SEC, and the AICPA to step in and jointly develop interpretive guidance to help them navigate the accounting impacts brought on by the Coronavirus Aid, Relief and Economic Security (CARES) Act, especially since nonfinancial companies were not given CECL relief.
“The CARES Act’s deferral ends at either the earlier of December 31, 2020, or when the President lifts the emergency act. That creates some accounting questions too about adopting this standard in interim periods subsequent to the first quarter and that proves very problematic,” Brad Bird, CPA, national assurance technical partner at BDO USA LLP, said. “For example, what about the effective date for the deferral? March 27, but adoption was January 1 – do they unwind on March 27? Or consider to have not adopted yet because the quarter has not yet ended?” he said.
Bird said there are some accounting anomalies or inconsistencies that could be produced that need to be worked through to marry up the legislation to what the current accounting standards are for CECL. “So it is important that the SEC and the FASB move fast so there is some clarity,” he said.
The FASB is “reviewing the legislation and remains in contact with the SEC, other regulators, and the AICPA,” a FASB spokesperson said on March 31 in response to a question about whether guidance was in the works.
Nonfinancials, Insurers Left Out
President Donald Trump on March 27 passed the CARES Act, the economic stimulus package that gives big banks, credit unions regulated by the National Credit Union Administration, and bank holding companies, an option to delay the adoption of the CECL rules to the conclusion of the national emergency sparked by the coronavirus (COVID-19) pandemic, or December 31, 2020, whichever comes first. The measure came on the same day banking regulatory agencies published an interim final rule to allow banks that adopt CECL this year to reduce the impact on regulatory capital for two years. This is in addition to the three-year transition period already issued.
The CARES Act only gives the deferral of CECL to specific entities – i.e., it is not a blanket deferral. This means that nonfinancial companies, for example, a company such as Apple Inc., and insurance companies that are required to adopt CECL on January 1, would still be required today to do so as written under U.S. GAAP.
“I believe that the banks were congress’ first concern,” Peter Bible, chief risk officer at Eisner Amper, said. “The notion that supports the suspension should apply to any entity that extends credit during these times,” he said.
Already the insurance sector has asked the FASB to expand the scope of the CARES Act deferral for CECL under GAAP. The American Council of Life Insurers (ACLI) in a March 27 letter to the board said insurance companies through their significant investing activities, are also vital to the proper functioning of credit markets. The organization, the main voice for the insurance sector, asked the board to consider codifying the language in the Act and expanding the scope of the optional deferral to “insurance companies, insurance holding companies and any subsidiary or affiliate thereof.”
In addition, the ACLI said the language used in the Act regarding the length of the optional deferral of compliance with the CECL standard needs to be clarified.
Board Parent Fought the Changes
The CARES Act measure comes after a hard fought battle by the FASB’s parent organization to stop legislative efforts to suspend the CECL rules, issued in 2016 as Accounting Standards Update (ASU) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, in response to the 2008 financial crisis. The guidance requires banks to provide a more timely report of the losses they expect from souring loans. Large public banks had to start applying it January 1; smaller reporting companies (SRCs) and private companies have until 2023 to apply the changes.
The Financial Accounting Foundation (FAF) expressed concerns to legislators in a letter about the political interference in the FASB’s standard-setting process, the impact of CECL suspension on investors and capital markets.
The FAF also pushed against another accounting provision in the Act that enables financial institutions to elect to suspend, during a covered period, requirements under GAAP for loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a troubled debt restructuring (TDR). Under the measure federal banking agencies must defer to the financial institution’s determination. The covered period begins on March 1, 2020, and ends the earlier of December 31, 2020, or 60 days after the date on which the national emergency declaration related to coronavirus terminates.
The FAF pointed out that since FASB staff and six banking regulatory agencies had already jointly issued a statement guiding companies on the TDR rules, adding provisions under the CARES Act was moot.
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.
This article originally appeared in the April 1, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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