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FASB

Golden, Lawmakers Spar Over CECL Implementation

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

By Bill Flook

FASB Chairman Russell Golden on January 15, 2020, sparred with lawmakers on a House Financial Services subcommittee over the board’s credit loss rules, rejecting calls to delay the standard for further study.

During the hearing, criticism of the so-called Current Expected Credit Loss (CECL) standard came from both the subcommittee’s chair and its top Republican, among others.

Rep. Bill Huizenga, a Michigan Republican and the committee’s ranking member, asked the FASB chief whether “it would be prudent to impose a moratorium” on the implementation of CECL until Congress has a better understanding of the negative impacts on consumer credit and other areas.

Golden said the FASB believes CECL should be implemented, and that the standard will improve the information available to the capital markets.

The standard, published in mid-2016 in Accounting Standards Update (ASU) No. 2016-13Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, is widely seen as the FASB’s most significant and far-reaching response to the 2008 financial crisis, addressing criticisms that banks were far too slow to recognize souring loans on their balance sheets. The rules take effect this year for large public companies, but smaller public companies and private companies have until 2023 to adopt the changes.

Under the credit loss standard, banks and other financial entities will be required to forecast into the foreseeable future to predict losses over the life of a loan, and then immediately book those losses. Banks and banking industry trade groups have recently stepped up efforts to delay or scrub the standard, which they argue will force them to needlessly hold more capital and pull back on lending in a crisis, when borrowers most need the funds.

The January 15 hearing was held by the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets, and featured testimony from both Golden and PCAOB Chairman William Duhnke.

Rep. Brad Sherman, a California Democrat who was named chair of the subcommittee late last year, used his first hearing in the new role to reiterate his frequent criticisms of CECL. Sherman, a CPA, pressed Golden on his basis for defending the standard.

Golden responded that the FASB believes CECL provides greater transparency to users of financial statements.

“We believe it gives investors better information,” he said.

Rep. Ann Wagner, a Missouri Republican, engaged in a particular testy exchange with the FASB chair, accusing the FASB of inadequately studying the damage CECL would do. In particular, the two argued over the so-called “procyclical” effects of forcing banks to increase loan loss allowance during an economic downturn.

Golden cited a Federal Reserve staff study finding that had CECL been in place at the time, lending would have grown at a slower pace leading up to the financial crisis, but grown more rapidly afterward. He said CECL, therefore, would be “less procyclical than the current model.”

Sherman and 10 other House lawmakers last year sponsored a bipartisan bill that would require the FASB to delay implementation of its credit loss standard for a year while the SEC and other financial regulators study its impact.

H.R. 3182, the CECL Consumer Impact and Study Bill of 2019, was introduced by Rep. Vicente Gonzalez, a Texas Democrat, in June. A parallel measure, S. 1564, the Continued Encouragement for Consumer Lending Act, was introduced in the Senate last year by Sen. Thom Tillis, a Republican from North Carolina, alongside five GOP cosponsors.

 

This article originally appeared in the January 16, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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