By Bill Flook
A House Democrat on April 17, 2020, introduced a measure to extend the length of an optional delay to the FASB’s loan loss rules to prevent the relief from ending in the middle of a bank’s fiscal year.
The bill (H.R. 6551) by Rep. Brad Sherman of California proposes to tweak a delay to the Current Expected Credit Losses (CECL) standard that was included as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, a COVID-19 economic aid package signed into law late last month.
The delay provision has created new uncertainty among banks, regulators, and investors as to the implementation of CECL during the novel coronavirus pandemic. The 2016 standard in Accounting Standards Update (ASU) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, requires banks and other public companies to record losses from souring loans on their balance sheets earlier than the previous incurred loss model, among other changes.
Large public banks had already begun to apply the changes this year when the CARES Act passed. Under the language of the COVID-19 relief bill, they can now delay implementing CECL until either the end of the year or until the national emergency declaration related to COVID-19 is lifted, whichever comes earlier.
That timeline would be tweaked under H.R. 6551, tentatively titled “To amend the CARES Act to ensure that the temporary relief from CECL standards does not terminate in the middle of a company’s fiscal year.” Sherman, a CPA who chairs the House Financial Services Committee’s influential Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, is perhaps the most vocal critic of CECL among Democratic lawmakers.
Sherman’s bill scraps the old timeline, and instead would end the CECL relief at the beginning of the fiscal year that begins after the end of the national emergency.
A FASB representative declined to comment on Sherman’s bill.
The legislation is part of a wider push by Sherman and other CECL foes to slow down or even halt the standard, a push that began well before the COVID-19 pandemic.
CECL 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 bad loans on their balance sheets. 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.
Several Republicans have separately filed bills that would delay CECL in light of the pandemic, arguing the rules will only worsen the economic downturn brought about by the crisis. Banking groups and other critics worry that the CECL model will cause banks to needlessly hold more capital and curb lending when borrowers need it most. Those worries have only intensified amid an accelerating economic freefall that has resulted from shutting down large parts of society to combat the virus.
The Financial Accounting Foundation (FAF), the parent group of the FASB, unsuccessfully sought to keep the CECL delay out of the CARES Act, warning Congress that the interference from Capitol Hill could compromise its independent standard-setting work.
FASB member Harold Schroeder recently spoke out in opposition to the delay, telling Accounting & Compliance Alert in late March that “investors do not like the lack of comparability an option will bring.” (See FASB’s Schroeder: Credit Loss Rules Not Trying to Drive a Particular Outcome in the March 27, 2020, edition of Accounting & Compliance Alert.)
“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.”
This article originally appeared in the April 21, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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