A number of developments have taken place over the past week with respect to the Financial Accounting Standards Board’s new credit loss standard. The standard requires organizations to move from a probable incurred loss model to a current expected credit loss model, or CECL.
In remarks at the AICPA’s National Conference on Banks and Financial Institutions, SEC Chief Accountant Wes Bricker focused on the need for banks and other financial institutions to focus on certain matters of judgment and internal control as they implement the new standard.
According to Bricker, critical judgments to be considered in implementing the CECL standard relate to the institution’s methodology, data, and assumptions, including:
- The period of historical loss and recovery information used by the entity, including the determination of what loans or other assets the historic information relates to, as well as what adjustments are made to the information.
- The extent to which management expects current conditions and reasonable and supportable forecasts to differ from the considerations that existed over the period of historical information evaluated.
- If the entity reverts to historical loss information, the loss information selected for periods that are beyond the reasonable and supportable period, and the reversion approach applied by the entity.
Referencing existing SEC guidance contained in Financial Reporting Release No. 28 (FRR 28) and SEC Staff Accounting Bulletin No. 102 (SAB 102), Bricker said, “The systematic methodology and documentation practices in FRR 28 and SAB 102 will continue to apply when determining the allowance and provision for current expected credit losses.”
Banking regulators update CECL FAQs
As reported by the National Association of Federally Insured Credit Unions, federal banking regulators recently issued an update to their joint FAQs on implementing the FASB’s new standard.
Among issues addressed are qualitative factors and the evaluation of the public business entity criteria.
The FAQs also address scalability of the new standard to institutions of all sizes. “Community institutions are not expected to need to adopt complex modeling techniques to implement the new accounting standard,” the FAQs state. “Further, institutions are not required to engage third-party service providers to assist management in estimating credit loss allowances under CECL.”
FASB agrees on troubled debt restructuring issue
At its board meeting last week, the FASB board agreed on how certain implementation issues relating to the new credit loss standard should be handled. The issue of troubled debt restructuring (TDRs) was raised, but lacked resolution, at a meeting of the credit loss transition resources group.
At its Sept. 6 board meeting, FASB board members agreed to the following:
- When a loan is individually identified as a reasonably expected TDR, all effects of the TDR should be reflected in the allowance for credit losses.
- At the point where an individual loan is specifically identified as a reasonably expected TDR, an entity must use a discounted cash flow (DCF) method if the TDR involves a concession that can be captured using only a DCF method.
According to Thomson Reuters Checkpoint, “the FASB said its decision will not result in a formal amendment to Accounting Standards Update (ASU) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Instead, the board plans to publish a memo about its discussion of the guidance for restructured loans, a spokesperson said.”
Additional information can be found in FASB’s tentative board decisions.