Credit unions, community banks to get more time to implement credit loss standard

The Financial Accounting Standards Board (FASB) on July 25, 2018, agreed to clarify its sweeping credit losses standard to ensure that community banks and credit unions have an extra year compared to large public banks to comply with the standard.

It was the board’s intent all along, FASB Chairman Russell Golden said. But the nuances of the language in Accounting Standards Update (ASU) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, suggested that the smaller, less complex financial institutions did not have the lead time that the accounting board envisioned.

“We intended to give these financial institutions longer,” Golden said. “There’s confusion out there, and we need to correct that confusion so that the board’s intent in the original document is appropriately reflected at the transition date for these financial institutions.”

The FASB plans to release the proposed wording change in August or September for a 30-day comment period.

The AICPA brought the issue to the FASB’s attention in a paper the group circulated in April. Jason Brodmerkel, staff liaison to the American Institute of Certified Public Accountants’ (AICPA) Depository Institutions Expert Panel, said he was pleased with the FASB’s decision.

“We’re very appreciative of the FASB taking our paper under consideration and happy to hear that they agree,” Brodmerkel said.

The current expected credit losses (CECL )standard, for current expected credit losses, is the FASB’s most important work to emerge from the 2008 financial crisis, after analysts, regulators and bankers complained that the existing incurred-loss standard prevented banks from booking losses they knew were coming as the mortgage market collapsed.

The new standard requires banks and other businesses to look to the foreseeable future, consider all reasonable and supportable losses that could happen over the life of the loan, trade receivable or security in question, and book losses. The estimate is not supposed to cover a best-case or worst-case scenario, and banks should take into account past experiences, future estimates and current trends in the economy, using their best judgment to record a loss provision.

Bank loss reserves are closely followed by investors and regulators because they are an early indicator of trouble brewing in a bank’s financial condition or the broader economy. Because the new guidance was such a change from existing accounting practice, the FASB called for financial institutions to comply with the standard on a staggered basis, depending on size. The board grouped them into public business entities, non-Securities and Exchange Commission (SEC) filer public business entities, and nonpublic business entities.

SEC filers — typically, larger financial institutions — must comply with ASU No. 2016-13 for fiscal years beginning after Dec. 15, 2019. For calendar year-end banks, this generally means a Jan. 1, 2020, effective date.

For public business entities that are not SEC filers, the new standard is effective for fiscal years beginning after Dec. 15, 2020, including interim period within those fiscal years. For calendar year-end banks, this means a Jan. 1, 2021, effective date, with quarterly reporting coinciding with the first quarter of 2021.

For banks that are not SEC filers and are not public business entities — typically, credit unions and community banks — the standard is effective for fiscal years beginning after Dec. 15, 2020, but these smaller institutions do not have to comply with quarterly filing requirements until periods beginning after Dec. 15, 2021.

However, the transition and effective date requirements of the standard require both non-SEC filer public business entities and nonpublic business entities to adjust retained earnings for the cumulative effect of the accounting changes as of Jan. 1, 2021, for calendar year-end entities.

“Consequently, the amendments effectively negate the benefit of providing [nonpublic business entities] with an extra year before implementing the guidance, contrary to the board’s original intent,” the FASB’s staff wrote in a memo.

The forthcoming proposal will call for amending the transition guidance for the nonpublic business entities and have them follow the accounting standard for fiscal years beginning after Dec. 15, 2021, including interim periods within those fiscal years. Community banks and credit unions will adopt the standard and adjust their opening retained earning balance as of Jan. 1, 2022, assuming they report on a calendar-year basis, the FASB said.

“It should be beneficial to these community banks and credit unions, this new guidance,” Brodmerkel said.

The FASB also discussed a question on the credit losses standard about lease receivables. The board agreed that to clarify that operating lease receivables are excluded from the scope of the credit losses accounting standard.

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