By Garver Moore
Abrigo Advisory Services Group
The June 20 Financial Accounting Standards Advisory Council (FASAC) meeting kicked off with a quiet barn-burner. In its public discussion, the council took up the issue of implementation timelines for updates – not just CECL — including an extremely high-level sidebar virtually calling into question whether the implementation timeline classifications that have been used for major pending updates like revenue recognition, lease accounting, and CECL are even meaningful to begin with.
At present, private/nonprofit reporters have an additional two years to prepare for CECL compared to SEC registrants, but for many of these major accounting updates only one year of additional time is allowed. The purpose of additional time for private preparers is ostensibly for them to observe and incorporate the lessons learned by public reporters, and the general sense of the room seemed to be that 1) this additional time is valuable and 2) only having one year is probably insufficient in the case of major updates. This stands to reason – if the ostensible purpose is to observe and incorporate learnings, presumably, one would want to see at least two statement releases to get a sense of the interplay between preparers, auditors, and users, at which point only 6 months would remain to prepare and execute.
No change to private cos/non-profits — even if adopted
It bears emphasis – private institutions already have a two-year preparatory period following the adoption date for SEC registrants when it comes to CECL. As a result, even if this notion were taken up by the board and resolved in its July 17 meeting, AND applied retrospectively to existing updates, it would not change the CECL adoption timeline for private/nonprofit preparers, though the logic of the change would militate to further push the “non-filer PBE” category from their additional single year to move with the private/nonprofit preparers. Beware the “FASB considers two-year delay” clickbait!
The more conceptually interesting issue taken up is whether these distinctions – “SEC registrant, PBE, and private/nonprofit” are even meaningful or appropriate in the first place. There is a lot of size and complexity “daylight” between Chase (JPM) — $360 billion market cap, $32.5 billion net income, $2.6 trillion assets — and Citizens & Farmers (CFFI) — $175 million market cap, $4.3 million net income, $1.5 billion assets. And given the substantive nature of updates currently in the implementation process, it doesn’t make intuitive sense that their implementation timelines would be identical simply by action of participating in a particular capital market. Indeed, that is really the only commonality of this designation paradigm, and there’s an argument to be made that just as those two preparers are fundamentally different other than sharing an industry (financial institution) and capital market (public stock exchange), their financial statement users might also be fundamentally different. Similarly – and of equal potential impact – some FASAC members discussed whether the “private” designation is meaningful in a world of multibillion dollar “private” “unicorns” financed by semiliquid debt and equity instruments, especially if investor protection rules were changed to allow greater public participation in these markets and their gains. In other words, at least some on the FASAC are acknowledging the increased irrelevance of “private”/”public” bright lines. Even setting aside the potential for retail investors to invest directly in private markets, public mutual funds make such investments today.
Existing legal frameworks preferred
Because this question was taken up as a general principle, and not specific to the CECL update, the traditional bright line of asset size that we typically use when discussing depository financial institutions is not necessarily a meaningful, comparable general classification for organizations across industries; an ideal taxonomy would consider sophistication, systemic importance, and audience/needs of financial statement users. A general preference was expressed for using existing bright lines from established legal/regulatory frameworks if implementation timelines or rulemaking were to change by designation, but no specificity on what those bright lines would be was offered.
These are thorny conceptual issues! Assume we could draw the “perfect” bright line, and A-class institutions adopted the standard 2 years in advance of B-class institutions – then B-class institutions would be learning and applying lessons from organizations that, by definition, were nothing like them! If we consider CECL specifically, and financial institutions specifically, and hypothesized a scenario where FIs with less than $500 billion in assets had a two-year delay (to move along with the private timeline), the learnings would only be useful for a very small handful of preparers. This is idle fantasy, but if the goal were to minimize implementation costs to industry and maximize comparability by establishing best practices, one might randomly sample preparers for any given update, designate them the lead group, and allow other preparers two years to establish their practices.
(It should come as no small relief the author is neither a member of the FASB, or its advisory council.)
The scenario flowchart at this point is complex: because the issue has been taken as a general notion, rather than specific to CECL, many cross-cutting issues would have to be resolved, and quickly so, to effect a change to implementation dates. Changes to implementation timeline designation would be of highest impact not just for CECL and not just for FIs, but for all preparers, and would merit careful study – the implementation deadline for SEC registrants might occur before the board is prepared to bifurcate that class of preparers in a general sense. We can simplify the scenario by assuming the following, though we must clarify we do not necessarily think any or all of these are likely:
1) The board does not make changes to designations (SEC registrant, PBEs, private/nonprofit)
2) Whether as a general principle or for CECL specifically, the board resolves that a two-year implementation staggering is the appropriate approach, agreeing with the notion that a 1-year period of later adoption yields little benefit.
3) If taken up as a general principle, the change(s) are retrospective to existing updates (CECL, Leases, etc.) as well as prospective to future updates (quantum accounting, disclosure of use of artificial intelligence in generating management discussion & analysis (MD&A) commentary or responding to analyst inquiries, etc.)
If the above conditions are satisfied, then:
- For SEC registrants: No change
- For non-registrant PBEs: An additional year to adopt
- Private/nonprofit: No change
The SEC registrants we work with in our consulting practice are running in parallel preparatory to adopting at the end of this year, and many have expressed a desire to adopt regardless of any potential delay optionality – the appetite to run two often-contradictory allowances is comparable to the appetite to have two bosses. We believe that as institutions adopt the standard and the fears and myths are dispelled, other institutions may eschew any additional time, elect to adopt, and move on with their core business.