By Denise Lugo
The FASB will consider revising its current expected credit loss (CECL) standard in four areas, including amending the disclosure rules to require more detailed information, according to board discussions on December 2, 2020, about initial findings on its post-implementation review (PIR) of the standard.
Board members Gary Buesser and Christine Botosan said disclosure revisions should be a board priority, stating the shortcomings staff research found with the disclosures were not a compliance issue but rather stemmed from lack of requirements within the rules.
“I think companies are complying with what we said to do and mostly what we asked them for was qualitative information – that’s not what users are looking for, it’s not what they need to understand the amount of reserve that an entity takes,” Botosan said. “They need quantitative disclosures about the inputs and companies are just not required to disclose those, we didn’t require it. So that’s why I think we should start working on this now, because I don’t think we’re going to see a lot of movement in this respect through the audit board SEC review process,” she said.
In addition to disclosures, staff members were instructed to research whether the board should amend the CECL standard under Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to: revise the accounting for assets that do not qualify as purchased financial assets with credit deterioration (non-PCD Financial Assets); eliminate accounting for troubled debt restructurings by creditors; and amend the scope of financial assets included in the standard.
ASU No. 2016-13 took effect in January for large public companies. Small public companies and private companies have until 2023 to adopt the changes. The standard requires companies to provide a more timely report of the losses they expect to incur from soured loans. Earlier this year, the FASB placed the standard under PIR, its process to determine whether a standard worked as intended. The PIR process is being done in real time, as opposed to waiting three-to-five years after the issuance of a standard as the board has done in prior years.
Staff members will bring back the four topics to the board at a future meeting for vote on whether to add projects to the technical agenda on the topics, the discussions indicated. Board members observed that a full reporting cycle has still not yet passed for public companies, and therefore some of the research findings could evolve.
“I want to reemphasize this is the beginning of our post implementation review journey, not the end, and so we understand that much of that feedback was people are learning about the model, particularly investors,” FASB Chair Richard Jones said. “They’re learning about the model, how it reacts, what’s useful information and I think we’re seeing that particularly as they ask for additional information about the application of the model by entities and I recognize we’re in an unusual environmental time. So some of the feedback leanings are more positive, some leanings more negative, but a lot of it recognizing that they’re going to take time to understand the model and understand its implications. I would refer to that as ‘the jury is still out,’” he said.
At a high level, staff research flagged the following issues:
- Accounting for non-purchased credit deteriorated financial assets: the accounting for purchased financial assets that do not qualify for PCD accounting treatment was unintuitive and complex. Non-PCD accounting leads to double counting the allowance for credit losses, overstates the yield on non-PCD assets, and is difficult to explain or understand. In addition, companies indicated that it was not clear what purchased financial assets qualify for PCD treatment.
- Troubled debt restructuring by creditors: some companies have questioned the usefulness of the accounting and disclosures for credit debt restructurings under the CECL standard. They believe that troubled debt restructuring for creditors guidance should be eliminated with certain loan modification disclosures enhanced.
- Amending the scope of financial assets included in ASU No. 2016-13: Nonfinancial institutions that adopted CECL indicated that there was minimal effect to their reserves when applying the guidance to trade receivables. Applying the standard to trade receivables was not worth the cost and effort and should be scoped out of CECL guidance, those companies said.
- Disclosures: substantial feedback was obtained from analysts who acknowledged CECL provides them with more information than under the incurred loss model (prior rules). However they suggested disclosure enhancements should be made to improve the quality of information being provided.
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 December 3, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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