FASB proposes to ease transition to CECL standard

The Financial Accounting Standards Board is proposing a way to simplify the transition to the new credit losses standard for banks and other financial institutions, such as vehicle-financing companies, by offering them an option to measure certain types of assets at fair value.

FASB issued the credit losses standard in 2016, opting for a current expected credit losses, or CECL, model for measuring credit losses on financial assets measured at amortized cost, instead of the previous incurred loss method. That approach differed from the one chosen by the International Accounting Standards Board, which opted for an expected credit losses model in IFRS 9, the IASB’s revised financial instruments standard under International Financial Reporting Standards.

In its standard under U.S. GAAP, FASB modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis. However, FASB has encountered resistance to that approach from some financial institutions, and it held a roundtable discussion last week at its headquarters in Norwalk, Connecticut, to hear their views (see FASB gets pushback from some banks on CECL).

FASB meeting
Financial Accounting Standards Board meeting at FASB headquarters in Norwalk, Connecticut

On Wednesday, FASB issued an accounting standards update that would let financial statement preparers irrevocably elect the fair value option, on an instrument-by-instrument basis, for eligible financial assets measured at amortized cost basis upon adoption of the credit losses standard. That approach, according to FASB, would increase the comparability of financial statement information provided by institutions that otherwise would have reported similar financial instruments using different measurement methodologies, potentially reducing costs for financial statement preparers while providing more useful information to investors and other users.

While many of the objections to the CECL approach came from mid-tier banks who had problems with the allowance for lifetime losses, the accounting standards update seems to be aimed mostly at alleviating problems with how auto-financing institutions have been using the fair value method.

FASB said some stakeholders—including auto financing institutions that extend credit to borrowers with limited or impaired credit histories—noted that certain financial statement preparers have begun (or are planning) to elect the fair value option on newly originated or purchased financial assets that have historically been measured at amortized cost. They argued that electing the fair value option would require them to maintain dual measurement methods: both fair value measurement and amortized cost basis.

Fitch Ratings recently issued a forecast on the impact of CECL when the new standard takes effect next year. The ratings agency predicted the initial adoption of CECL would result in a decline in shareholders’ equity and a corresponding increase in loan loss reserves, net of newly created deferred tax assets, on financial institution balance sheets.

“CECL could result in unintended consequences if implemented in its current form,” said Fitch. “Banks may be unwilling or unable to lend during periods of economic stress due to pressured earnings and/or regulatory capital ratios, which could constrain an economic recovery. Financial institutions may also be reluctant to extend credit, specifically in times of stress given the upfront negative earnings impact of higher provision expenses and longer payback periods for new loans on a GAAP basis.”

FASB is asking for comments on its proposed standards update by March 8.

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