The FASB by 5 to 2 voted against deferring the effective date of credit loss accounting rules for nonpublic entities a third time, stating a deferral would delay the inevitable and create uncertainty. FASB Chair Richard Jones and Vice Chair James Kroeker signaled they were open to granting private companies the option to adopt the rules – or not.
The majority board vote means the current expected credit losses (CECL) standard has to be adopted next year by small public companies, private companies, and not-for-profits.
Board members said while they were sympathetic to the challenges smaller financial institutions faced when applying the rules, a lot of simplifications have been made. Also important, is having a unified standard applicable to those most impacted by the CECL rules, according to the discussions.
“It’s one industry, we need one accounting standard for credit,” FASB member Fred Cannon said. “You have to remember, in lending credit is the most important risk factor for institutions,” he said. “When we think about it when financial institutions – whether they’re credit unions, community banks, private fin tech firms or larger financial institutions, they’re all vying for the same customers. They’re competing with the same products and similar services and taking similar risks, and so they need to be on one accounting standard.”
The discussions come after about two years of petitions to the board from community banks and credit unions who asked for a deferral on Topic 326, Credit Losses, or a full exemption. The standard was issued in 2016 to require a more timely reporting of credit losses – a response to the 2008 global financial crisis. The rules were deferred twice before, according to the discussions.
Already Got Two Deferrals
Companies and organizations that asked for a third deferral said elements of CECL are complex, require onerous data collection, and have punitive capital implications.
They have also argued that the CECL standard was originally developed to correct procyclical loan loss provisioning under legacy GAAP and to provide investors and publicly traded equities with more decision-useful information and therefore should not be applicable to entities with no shareholders and that prepare financial statements primarily for prudential regulators.
Staff members said after extensive outreach over years, no new information has come to light that the board did not previously consider and which would justify changing the scope of entities subject to CECL at this point in time.
Currently, the standard is under post-implementation review (PIR), the board’s process to determine whether a standard worked as intended.
Staff members have been doing outreach to facilitate the adoption of the rules and will continue that level of engagement and support throughout the year, the discussions indicated. They have also collaborated with prudential banking regulators and have noted that regulators have developed scalable approaches to adopt CECL.
Both Jones and Kroeker landed at similar conclusions but made different arguments.
Kroeker said his view that a private company option be granted was influenced by the National Credit Union Administration (NCUA), the agency charged with insuring credit union deposits, protecting member of credit unions, and otherwise regulating them.
“So we got a letter from the then chair, current board member of the NCUA that said the compliance cost associated with implementing CECL overwhelmingly exceeds the benefit,” he said. “Talks about the 5,200 plus credit unions that are overseen by then and how 70 percent of those credit unions are under $100 million – they effectively regulate those institutions today under the incurred loss model.”
Jones said public companies of all sizes needed to be on the same model, but the majority of other companies are commercial companies with Trade accounts receivables, which the rules will not significantly impact.
In addition, prudential regulators have an ability to narrow GAAP, which means every time the board grants a practical expedient they have a process to decide whether they will incorporate that practical expedient for private companies into their regulatory framework or not, he said.
Jones said he would not support a temporary deferral as it “just kicks the can down the road” but “I would have supported making an accounting policy election, but since only two of us in that camp, that’s not where we’re headed today.”
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 February 3, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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