FASB now expects final CECL rule in 2016

Oct 6, 2015

**The FASB issued the final CECL standard on June 16, 2016. For up-to-date information and resources, access the updated CECL Prep Kit.

 

The Financial Accounting Standards Board (FASB) now anticipates its final version of the long-debated current expected credit loss (CECL) model will be issued in the first quarter of 2016, a board spokeswoman said Monday.

The board’s staff, which last month indicated it expected the final rule on recognizing impairment and estimating credit losses to be issued by year end, is using the extra time to incorporate recent feedback on the standard, FASB spokeswoman Christine Klimek told Sageworks Monday. The time will also allow the board to hold a public meeting on whether it should change one aspect of the rule related to accounting for troubled debt restructurings, or TDRs.

Klimek said the FASB recently circulated the draft standard among 29 external reviewers, including auditors, regulators, preparers and users, to troubleshoot such issues as understandability of the language, operational challenges, editorial corrections and any other major issues aside from the central decision related to the proposed rule. Industry insiders often refer to this confidential process as a “fatal flaw” review.

The review generated about 1,000 comments – a not-unusual volume of remarks – and staff, three board members and about 20 of the reviewers met privately on Sept. 30 to discuss them, Klimek said. The subgroup of 20 reviewers will become the Transition Review Group, which will hold public meetings after the final rule is issued. That group will also work with FASB staff on developing additional guidance as needed for implementation.

Based on that Sept. 30 meeting, the FASB staff is making changes to the final version of the standard, but one issue related to TDRs that was discussed then will be brought before the board again so that members can consider whether to change a previous decision, according to Klimek. Respondents had asked the board to reconsider changes to accounting for TDRs, with some saying the accounting for TDRs (specifically relating to the cost basis adjustment and consideration of prepayments) would be very costly and would increase complexity in financial statements.

Klimek said that board meeting, and any other public meetings to discuss the comments from the external review and to review an analysis of the cost-benefits of the new standard vs. existing GAAP standards, would take place as soon as late October or early November.

She reiterated the expectation that a majority of the board would approve the final rule. A published report in September said two members of the FASB would oppose the final version of a proposal first issued in December 2012. Klimek noted that dissent among board members is not uncommon, and all seven board members agree on how to measure credit losses. Two members, however, disagree that recognition should be on day one.

“The project was driven by concerns that current GAAP does not require banks and other institutions to report loan losses until they actually occur,” she said. Previously, preparers were not permitted to reflect their expected losses in the allowance for loan losses.

“The new current expected credit losses (CECL) model provides this flexibility, allowing management to estimate cash flows that it expects to collect based on a review of all available information, including historical experience, as well as reasonable and supportable forecasts about the future,” she said.

Klimek noted that since issuing its proposed standard, the FASB has conducted extensive outreach, and investors have overwhelmingly favored the CECL model over others because it better reflects the credit risks of loans on an institution’s balance sheet. “For that reason, the new model will be required for use by all banks and institutions, both large and small,” she said. “However, the board will consider a delayed effective date for small institutions to provide additional time to incorporate the model into their systems.”