By Denise Lugo
FASB Chairman Russell Golden told the board’s trustees that a majority of large public companies, including banks, that had to adopt credit loss accounting rules this year have already done so—a signal that legislative actions to delay the rules were moot.
Golden said the FASB is closely monitoring the questions companies have had as well as the input they have provided to investors, looking at quarterly disclosures and studying investor discussions.
“So far we think that the implementation has been a quality implementation, but we plan to continue to look at implementation in the second and third quarter to see if there’s anything more the FASB needs to do,” he told trustees of the Financial Accounting Foundation (FAF) on May 13, 2020.
His remarks came in response to a question posed FAF trustee member Michael Rollings, who asked how the banking industry responded to the optional deferral provided on the current expected credit loss (CECL) standard under the Coronavirus Aid, Relief and Economic Security (CARES) Act. Rollings also asked and how well the board thought the CECL standard is working given the current crisis.
Under the CARES Act, large banks, credit unions regulated by the National Credit Union Administration (NCUA), and bank holding companies were singled out for special treatment so that they can opt out of adopting the CECL standard this year as the rules require. The legislation was passed three months after the effective date for large public companies, set for January 1, 2020. Smaller public companies, private companies, and not-for-profit organizations have until 2023 (under GAAP) to apply the rules.
Golden’s remarks mean that additional legislation that is in the works for a further delay of CECL rules for the same demographic might be a wasted effort. (See House Bill Would Extend CECL Delay in CARES Act in the April 21, 2020 edition of Accounting & Compliance Alert.)
The FASB issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326), in 2016 in response to the 2008 financial crisis. Some felt the crisis was exacerbated by the fact that the accounting rules restricted banks from being able to report credit losses they were expecting in a timely manner. The CECL standard aims to fix those concerns by requiring companies to forecast into the foreseeable future to predict losses over the life of a loan, and then immediately book those losses. Prior to the CARES Act, legislators tried to pressure the board to do an impact study, fearing it will deter lending.
FAF Chair Offers Rare Rebuke
FAF Chair Kathleen Casey, in a rare direct public response from the organization, said the current crisis has created a new challenge to the integrity of the standard-setting process.
Congress in late March included language in the CARES Act that provide certain stakeholders a temporary exemption from GAAP, Casey said.
“We were very disappointed by this action and continue to work to protect and defend the integrity of GAAP and the standard setting process,” said Casey. “As our country looks to recover from the extraordinary economic effects of this pandemic, it will be vital that we preserve confidence in accounting standard setting and the quality of financial reporting to support the strength and growth of our markets and economy.”
Prior to its issuance, the FAF had pushed for the CECL delay provision to be removed from the CARES act, lobbying right up until the run-up to the vote. Casey, in a direct appeal, told Senate and House leaders in letters late March the delay risked harming investors and capital markets.
“The nation’s biggest banks have already made significant investments in systems and business processes to comply with CECL,” said Casey, a former SEC commissioner. “Many have already communicated to investors their expectations about the likely impact of CECL on their upcoming financial results,” she wrote. “Suddenly unwinding those investments and expectations will add unnecessary costs for the banks and create confusion for investors.”