Banks, lawmakers, and trade groups in recent weeks have pressured the FASB to delay the effective date for the board’s credit loss standard. But with the 2020 effective date for publicly traded banks approaching, the FASB wants businesses to keep planning for an on-time implementation.
Despite pleas from banks, trade groups, and some lawmakers for the FASB to halt when banks must comply with the board’s sweeping new loan loss rules, FASB Vice Chairman James Kroeker said banks need to implement the standard by its effective date.
“CECL is the enacted standard,” Kroeker said during a November 12, 2018, press briefing, using the acronym for the board’s current expected credit loss standard. “I would encourage people to continue to move forward, expecting to implement on the effective date.”
The FASB published Accounting Standard Update (ASU) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, in June 2016 in reaction to the global financial crisis, which revealed flaws in the incurred loss accounting model that had been in place since the 1990s. The incurred loss model allowed banks to record losses on loans and other financial products only after the losses have happened. Banks did not report their write-downs until after the market imploded.
The new model will make businesses to look to the future, assess broad economic factors and consider past experience to make estimates on expected losses and set aside corresponding loan loss reserves. Publicly traded banks must comply with the standard in 2020.
Banks have openly fretted about the implications of the new guidance. Many banks have questioned how they are supposed to forecast losses. Some banks say the new accounting will restrict lending as the economy sours. As losses appear on the horizon and they have to beef up their loan loss reserves, they will be less likely to originate loans to customers to guard against piling up new losses.
Several banks and trade groups have raised these concerns to the Financial Stability Oversight Council (FSOC), a Dodd-Frank Act panel chaired by Treasury Secretary Steven Mnuchin that monitors the health of the financial markets. The panel is designed to spot risks in the financial system before they can drag down the broader economy. The banks asked regulators to study the economic and public policy implementations of the new accounting standard before it is allowed to become effective.
Kroeker’s comments suggest that there is little interest among FASB members to delay the standard. He gave the briefing at Financial Executive International’s Current Financial Reporting Issues conference in New York. The board is planning to publicly consider, however, a proposal recently developed by a group of regional banks that would change a core aspect of the standard. (See Regional Banks Seek Changes to Credit Loss Standard in the November 7, 2018, edition of Accounting & Compliance Alert.)
The banks said their proposal preserves the concept from ASU No. 2016-13 for a so-called lifetime loss allowance. But they want the provision for credit losses to be measured in three parts instead of one. For financial assets that have not been written down, loss expectations within the first year would be recorded to the provision for losses in the income statement. Loss expectations beyond the first year would be recorded to accumulated other comprehensive income (AOCI). For impaired financial assets, the lifetime expected credit losses would be recognized entirely in earnings.
Kroeker said the board was committed to vetting the proposal in public, but he did not state the likelihood, when asked, that the FASB would change the standard so close to the effective date.
The board’s research staff is considering the request and taking a look at what it would mean if the FASB agreed with the bank request, particularly with regard to the information delivered to investors, Kroeker said. One concern is that the FASB would have leave current GAAP in place beyond 2020 while the board considered writing an amendment to the standard.
“I would say, stay tuned,” he said.
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 on Checkpoint 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.