The spotlight is shining brightly this month on potential changes to the current expected credit loss (CECL) model, even though the implementation deadline clock is ticking.
The Financial Accounting Standards Board (FASB) plans to host a public roundtable discussion in January to give financial institutions and others an opportunity to discuss transition issues, concerns and proposals, such as one by a group of banks to change the way CECL’s impacts are recorded in financial statements. “While we don’t yet have a firm date for the roundtable, we expect it will take place at the FASB offices in Norwalk, Connecticut, in late January,” Christine Klimek, senior manager of media relations for the FASB, said in an email.
Announcing the roundtable during a Dec. 19 meeting, FASB Chairman Russ Golden referenced the proposal by 21 regional and larger banks. The pitch seeks to have provisions for loss expectations within the first year recorded in the income statement, while loss expectations beyond the first year would be recorded to Accumulated Other Comprehensive Income. Lifetime credit losses for impaired financial assets would be recognized entirely in earnings. Klimek said the FASB plans to discuss this request at a public board meeting late in the first quarter.
Learn more about navigating the CECL transition.
Golden said the roundtable could also provide additional feedback on the board’s plan to clarify credit quality disclosure requirements in the standard by requiring that gross write-offs and gross recoveries be presented by origination year. This issue, discussed at the FASB’s Nov. 7 meeting was originally scheduled to move to the next step of adoption, but Golden said additional research needs to be completed.
The roundtable will be the latest in many forums for financial institutions, preparers, financial statement users and other interested parties to provide input on an accounting standard update that has been in the works since the 2008 financial crisis. Issued in 2016, the standard requires public business entities registered with the Securities and Exchange Commission (SEC) to comply with CECL by Q1 2020, while non-SEC filers and all other entities have until 2021 or 2022 to transition to forward-looking credit loss models from the existing incurred-loss model.
“Since issuing the credit losses standard in 2016, FASB members and staff have been working with stakeholders to facilitate a smooth transition by addressing questions and obtaining feedback on the guidance,” Golden said in a statement. “The roundtable will provide stakeholders yet another opportunity to discuss cost-effective issues they believe the Board should address.”
Cost-benefit issues, in particular, have come under fire recently. Industry representatives who were witnesses at a Dec. 11 hearing held by the House Subcommittee on Financial Institutions and Consumer Credit expressed concern that insufficient quantitative analysis had been conducted of the costs vs. the benefits of the new accounting rule for credit losses. The American Bankers Association has called for a delay in implementing CECL until a quantitative impact study could be completed that assesses the impact of shifts in pricing and availability of credit to consumers and commercial borrowers. The FASB hasn’t directly addressed this request yet, although it has noted the development of CECL involved extensive stakeholder outreach and analysis, including “a detailed cost/benefit analysis.”
Subcommittee Chairman Rep. Blaine Luetkemeyer, R-MO, on Dec. 21 introduced a bill prohibiting federal financial regulators from requiring compliance with CECL, but the 115th Congress adjourned without action on the bill and there was no immediate word on plans to re-file the bill in the 116th session. In addition, the Financial Stability Oversight Committee on Dec. 19 met in an executive session to discuss the implications of adopting CECL, but the committee took no action.
To help cushion any negative impact that might result from adopting CECL, regulators have already approved a rule giving financial institutions the option to phase in the day-one adverse effects on regulatory capital over three years.