At this morning’s Financial Accounting Standards Board meeting, the board voted to approve issuing a final standard on Financial Instruments – Impairment, better known as the standard on credit losses. To allow sufficient time for implementation, FASB decided to defer the original (proposed) effective date of the standard by one year, and anticipates publishing the final standard in June, 2016.
Also known as the “CECL” (Current Expected Credit Loss) standard, the upcoming standard represents a major change in how loan losses and other credit losses are to be recognized in the financial statements, by moving from an ‘incurred loss’ model, to the CECL model. A recommendation to consider such a change was issued by a joint advisory group of the FASB and the International Accounting Standards Board, the Financial Crisis Advisory Group. The FCAG considered views that reserving for, and recognizing credit losses under the longstanding ‘incurred loss’ model may have lagged behind economic reality and impaired transparency, particularly during the credit meltdown of 2008-2011.
Final Standard Expected in June
As part of its formal due process, the FASB technically voted today to instruct its staff to prepare a ‘ballot draft’ of the final standard for board members to review, to ensure the wording of the final standard is consistent with their understanding of what it would say, based on decisions reached during deliberations to date. The FASB anticipates the process will be completed within the next couple of months, such that the final Accounting Standards Update will be published by the end of June, 2016.
Following are the decisions reached by the FASB on the rollout of the effective date of the standard for various constituencies. This schedule incorporates the overall one-year delay decided by FASB today (vs. the proposed effective date in the Exposure Draft issued for public comment). The staggered implementation dates also illustrate FASB’s practice of allowing more time for private companies and certain other non-public entities to implement new standards, vs. public companies which are viewed as tending to have more resources to direct to changes in accounting standards and related systems and internal control changes. The effective date for the new credit loss standard is expresed by FASB as follows:
- Public companies that meet the definition of a U.S. Securities and Exchange Commission filer: fiscal years (and interim periods within those fiscal years) beginning after December 15, 2019.
- Other public companies: fiscal years beginning after December 15, 2020 (including interim periods within those fiscal years).
- Private companies, not-for-profit organizations, and employee benefit plans: annual periods beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.
- Early adoption will be permited for all organizations for fiscal years beginning after December 15, 2018 (including interim periods within those fiscal years).
As noted above, FASB has offered additional time (beyond that for public companies) for not-for-profit entities and employee benefit plans to implement the new credit loss standard. If you are a financial executive or auditor of not-for-profits or employee benefit plans, consider attending the MACPA’s Government and Not-for-Profit Conference, April 29 at the University of MD- University College (College Park), and Employee Benefit Plan Conference, May 16 at the Sheraton Columbia Hotel (attend in-person or via simulcast/webcast).
See also FASB’s press release issued today.