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FASB

Survey Shows Investors’ Mixed Views on Credit Losses Standard

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

The FASB has heard plenty of complaints from banks about its new credit losses accounting standard, but now some dissatisfied investors and analysts are chiming in. An Atlanta-based investment firm has issued results of a survey showing investor concerns about the new accounting rules.

More voices are joining the debate about the FASB’s much-watched credit losses standard.

An Atlanta-based investment firm on January 11, 2019, published the results of a survey of 53 investors and analysts, with most of them questioning the benefits of the new accounting rule, sometimes referred to by its acronym “CECL,” for current expected credit losses.

“My takeaways are that investors clearly are not fans of CECL,” said Christopher Marinac, research director at FIG Partners LLC, a firm that specializes in analyzing banks.

The firm asked for input on the new accounting standard, Accounting Standards Update (ASU) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, from bank analysts and generalist equity investors. Those who responded to the firm’s survey cover large financial institutions as well as community banks, Marinac said.

Of those who responded, almost 85 percent said they believed existing bank loan loss accounting rules were sufficient. In a section of the survey that solicited open-ended comments, some raised concerns about the new standard shrinking the availability of credit. Another investor raised questions about understanding whether a bank’s estimates of losses are accurate enough. In another piece of feedback excerpted in the survey, a respondent said the FASB needed to test the standard further before allowing it to be implemented.

The FASB is no stranger to these concerns and questions about the standard, which the board published in 2016 and is considered its most significant piece of work to emerge from the 2008 financial crisis. As the public company 2020 effective date of the new standard approaches, the board has been fighting off pressure from critics who have been calling on the board to either delay the major new accounting standard or tweak pieces of it so it is more palatable to banks.

Most of the complaints so far, however, have come from banks themselves. The board plans to hold a public roundtable on January 28 to let banks air grievances about what is considered the biggest change to bank accounting in decades. Investors, regulators, and auditors are also expected to attend.

“We look forward to hearing diverse views of our stakeholders during our roundtable,” a FASB spokesperson said when asked about the results of the FIG Partners survey.

The new loan loss rules emerged out of the financial crisis, when banks, regulators, and investors complained that existing GAAP did not allow financial institutions to recognize losses they knew were on the horizon as the economy went into a tailspin. The new standard will require banks to look to the foreseeable future, make reasonable and supportable estimates, and recognize losses on loans the day they write them. The accounting change is expected to result in banks recording higher loan loss provisions as well as more regulatory capital.

In the lead up to applying the new accounting standard, banks, trade groups, and some lawmakers say the beefed-up regulatory capital requirements will result in less money to lend to customers during an economic downturn. They also have fretted about how increasing loan loss provisions will affect their earnings.

The FASB has defended the new accounting standard, which took almost a decade and several drafts to produce. Over the course of developing the standard, the board said it spoke to more than 200 investors to seek input on the best ways to improve the complex area of accounting.

“In short, the FASB devoted a significant amount of time and resources to ensure that it considered and benefited from views from a broad array of stakeholders during its deliberations,” FASB Chairman Russell Golden wrote in a 14-page letter to the Bank Policy Institute, a trade group that has called on the board to delay the effective date of the standard.

In the same letter, Golden also acknowledged the criticisms about the standard.

The “standard-setting process sometimes results in controversial outcomes,” Golden wrote. “It is natural that some stakeholders will occasionally disagree with board proposals, but CECL is an excellent example of how the process works effectively.”

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.

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