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FASB’s Schroeder: Credit Loss Rules Not Trying to Drive a Particular Outcome

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

By Denise Lugo

A day after U.S. legislators moved on an economic stimulus package that includes a provision that enables large banks to temporarily opt out of adopting the current expected credit loss (CECL) standard, FASB member Harold Schroeder spoke out to defend the accounting standard, stating “investors do not like the lack of comparabilty an option will bring.”

Schroeder told Thomson Reuters in a March 26, 2020, interview investors are frustrated that an option approach is being allowed.

“Instead of making it easier, the optionality is making it more difficult and they don’t know who’s going to take the option or not—they may be surprised in April when the first quarter comes out,” said Schroeder, who provides the investor viewpoint in board standard-setting. “So I think there’s some frustration on the part of investors, even those that aren’t CECL advocates are a little frustrated and would prefer to have no optionality here – would prefer to go to a CECL model.”

He stated that the CECL rules enable banks to better reflect their risks when making initial loans and how that risk changes over time, a better accounting than under old rules. “You’re going to end up with a better understanding of what your risk is at a point in time and how that risk is changing over time and that’s really what that standard has been about from the beginning: better aligning the accounting with changes in risk,” Schroeder said.

The Coronavirus Aid, Relief and Economic Security (CARES) Act, voted on in the Senate on March 25, keeps language that would give big banks the option to postpone the CECL standard through the end of the year, or until the end of the COVID-19 crisis. The House vote on March 27 is expected to be similar. (See Delaying New Credit Loss Accounting Rule Remains Part of Coronavirus Stimulus Package, Senator Crapo Says in the March 26, 2020, edition of Accounting & Compliance Alert.)

The legislative measure comes almost three months after the CECL standard took effect, rules issued under Accounting Standards Update (ASU) No. 2016-13Financial 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.

“This was not just a standard that they could just adopt overnight, they spent years cleaning up data, changing internal control processes, improving internal control processes, improving information processes and frankly improving internal communication and coordination, something that was lacking particularly if you talk to risk managers,” Schroeder said. “So I think there’s been a lot of effort put forth, and at least in private conversations I think the general view is that this has been an improvement.”

The FASB’s parent organization, the Financial Accounting Foundation (FAF), has been trying over the past year to curb legislative interference on the CECL rules, fearing it impedes the independence of the board’s standard-setting process, and would negatively impact investors and capital markets. FAF Chair Kathleen Casey, in a last minute push, had asked Senate and House leaders in a March 23 letter to remove the rule-delay provisions from the CARES Act or risk harming investors and capital markets.

In a follow up statement to legislators on March 25, Casey requested again the provisions be removed from the coronavirus relief package language to troubled debt restructurings (TDRs) and to the CECL standard. “The former is unnecessary because the Financial Accounting Standards Board staff and prudential regulators have already clarified that application of GAAP covered by the action requested in the bill, and the latter will create confusion for investors, add costs for lenders, and fail to address the underlying issue of regulatory capital,” she wrote.

Checkpoint subscribers can find the latest tax and accounting news and analysis related to the ongoing COVID-19 (coronavirus) pandemic by searching or navigating to our new COVID-19 Guidance folder. This folder can be accessed from the top of the Table of Contents or included in searches (be sure to select it). The folder will be available beginning at 3:00 PM ET on Friday, March 27, 2020.

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 March 27, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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