FASB gets pushback from some banks on CECL

The Financial Accounting Standards Board held a roundtable discussion this week on its new credit losses standard, where it heard from banks, accounting firms, banking regulators and investor representatives, with some mid-tier banks asking FASB to reconsider some of its requirements.

The credit losses standard is also known as the CECL standard, since it follows a Current Expected Credit Losses model that differs from the model adopted by the International Accounting Standards Board’s financial instruments standard, IFRS 9, under International Financial Reporting Standards. But some of the banks seem to wish that FASB had gone along with the IASB’s approach.

Last November, a group of banks, including BB&T, Comerica, KeyCorp, SunTrust and Synchrony, submitted a letter to FASB chairman Russell Golden asking the board to delay the standard and make some changes in it. They proposed an approach that would “retain the CECL methodology’s intent of establishing an allowance for the lifetime of an asset on the balance sheet, but recognize the provision for credit losses in three parts: (1) for non-impaired financial assets, loss expectations within the first year would be recorded to provision for losses in the income statement with (2) loss expectations beyond the first year recorded to Accumulated Other Comprehensive Income ("AOCI'') and (3) for impaired financial assets, lifetime expected credit losses would be recognized entirely in earnings.”

FASB meeting
Financial Accounting Standards Board meeting at FASB headquarters in Norwalk, Connecticut
Former FASB member Larry Smith, now senior managing director of Forensic & Litigation Consulting at FTI Consulting

Former FASB member Larry Smith, who is now a senior managing director at FTI Consulting, attended the roundtable Monday. He originally voted against the CECL standard in 2016 when he was a member of the board, along with FASB vice chairman James Kroeker. He is seeing some of the anticipated problems emerging as banks struggle to adjust to the standard before it takes effect in 2020 for public companies and at the beginning of 2022 for private banks and credit unions.

“Effectively what they did was they proposed an alternative approach whereby effectively they would retain the CECL methodology for establishing the allowance for the lifetime losses, but they would effectively segregate it,” he told Accounting Today. “So on the balance sheet you'd have the allowance for the full expected losses, but the P&L wouldn't have the full charge like it would under CECL. What will flow through earnings would be basically loss expectations for the first year for financial assets that are not considered impaired, and then for impaired assets you would have lifetime expected losses that would also be recognized entirely in earnings, and the rest of it would go into accumulated comprehensive income.”

He sees some resemblances with the approach taken by the IASB in the international standard for financial instruments. “It's a model that is very similar to IFRS 9,” said Smith. “The proponents of the proposal basically believe that what gets recorded in the income statement doesn't reflect the economics of lending. Therefore they feel that their proposal better reflects the economics of lending from a personal standpoint, but also achieves one of the most fundamental aspects of CECL, and that is to have the full amount of the lifetime expected losses sitting on the balance sheet as the allowance for doubtful accounts.”

While representatives of some of the mid-tier banks that signed the letter supported that approach at the meeting, representatives of larger banks like Wells Fargo, Citigroup and JPMorgan Chase did not seem to support the proposal, according to Smith, nor did officials from community banks. Banking regulators from the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Federal Reserve were also in attendance, but did not weigh in on the proposal.

“I think the representatives from the larger banks thought that one of the fundamental considerations put forth in the proposal was the impact of it on regulatory capital,” said Smith. “Quite frankly, it was kind of interesting. First of all, the banking regulators did not say anything. But even if this proposal were to be adopted by the FASB, there's no assurance of what the banking regulators would do, in terms of how regulatory capital might be impacted by the proposal. So there's no guarantee that they'd get what they want, but the proponents of the proposal rebutted the arguments or statements by some of the larger banks, saying no, although it might have regulatory capital ramifications, that their primary purpose was to get the P&L more fairly stated from their perspective. The big banks and the smaller banks raised concerns that the proposal would add a level of complexity that doesn't exist today because you'd have to come up with some type of an estimate of what the losses would be in the next year.”

The FASB staff is going to do some research and report back to the board about the proposal.

“Is there still time to turn around the boat? I know banks are already getting ready for this new standard,” said Smith. “Whatever they're doing now on implementing CECL, they would have to do for this proposal as well because the full credit losses will still be recorded as your allowance for doubtful accounts. So whatever they're doing now, it's not time wasted or energy wasted because they'd have to do it for this proposal anyway. The key is that they'd have to do some other things in addition to that for purposes of estimating the amount of the losses for those assets that are not impaired over the next 12 months, as well as identifying impaired loans or impaired assets and calculating what the lifetime losses would be for those. I'm sure that there will be a number of questions raised as to how you do that and what's meant by it. So if the board were to consider this, my expectation would be that it would result in a delay in the implementation date.”

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