FASB offers help with credit loss standard
The Financial Accounting Standards Board has released staff guidance on FASB’s new credit losses standard and how to estimate credit loss reserves.
The document includes a set of questions and answers on specific issues related to the weighted average remaining maturity (WARM) method for estimating the allowance for credit losses. Banks and other financial institutions are preparing for the so-called CECL standard, named after current expected credit losses model used by FASB in Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
The credit losses standard that FASB issued in 2016 requires banks and other organizations to measure all of their expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts with the objective of presenting an entity’s estimate of the net amount expected to be collected on the financial assets. The standard doesn’t require a specific credit loss method, but it permits organizations to use their judgment in deciding what relevant information to use and the estimation methods that make sense in their circumstances.
Some of FASB’s constituents, including small financial institutions, have asked the FASB staff whether it would be acceptable to use the WARM method to estimate expected credit losses. The WARM method relies on an average annual charge-off rate as a foundation for estimating the credit losses for the remaining balances (that is, losses occurring through the end of the contractual term) of financial assets in a pool at the balance sheet date.
In the question-and-answer document, the FASB staff said the WARM method is one of many methods that could be used to estimate an allowance for credit losses for less complex financial asset pools. The staff also offers some examples of how it could be used.