The FASB published an update to U.S. GAAP to clarify its new accounting standard requiring earlier recognition of credit losses to ensure that community banks and credit unions have enough time to comply with it. The update states that these types of institutions do not have to follow the standard until 2022.
The FASB on November 15, 2018, published an update to U.S. GAAP to clarify that community banks and credit unions have until 2022 to comply with the FASB’s new credit losses standard.
The board published Accounting Standards Update (ASU) No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, to align the implementation date for nonpublic entities’ annual financial statements with the implementation date for their interim financial statements. The update states that nonpublic business entities have to follow the standard for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. This means a 2022 effective date for smaller institutions, which the FASB has said includes most community banks and credit unions.
“Since issuing the credit losses standard, the FASB staff has been working with stakeholders to address questions and obtain feedback on the guidance,” FASB Chairman Russell Golden said in a statement. “Their input helped us develop the clarifications and improvements in the new ASU to ensure a smoother transition to the standard.”
The update also clarifies that operating lease receivables are not subject to the credit losses standard.
The FASB published ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, in June 2016 to introduce to GAAP a new method by which banks and other businesses must estimate losses on loans. It requires businesses to look to the future, estimate reasonable losses, consider historical experience, and make estimates about expected credit losses. It is considered the biggest change to bank accounting in decades.
The FASB intended for large, publicly traded banks to start complying with the new rules in 2020 and smaller banks to follow in 2021 and 2022. As originally published, however, community banks and credit unions told the FASB that they would have to apply the standard earlier than they thought.
As originally written, ASU No. 2016-13 stated that nonpublic business entities had to apply the new accounting requirements for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The transition guidance in the standard requires businesses to make what the board calls a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the new accounting rules become effective.
Banks and professional groups said this wording meant credit unions and community banks effectively would be adopting the standard as of January 1, 2021, because of the cumulative-effect adjustment required at this date. This would mean they would be adopting the new, wide-ranging standard at the same time as large publicly traded banks.
The update is based on a proposal the FASB released in August, via ASU No. 2018-270, Codification Improvements to Topic 326, Financial Instruments—Credit Losses.
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.