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CUs Buckle Down for Hard Transition to New Loan-Loss Rule
Tuesday, June 28, 2016 6:40 AM

After a fierce debate, the Financial Accounting Standards Board has issued its long-awaited and highly controversial Current Expected Credit Loss standard.

The announcement last week served as finale to a grueling process that began in 2008 when the FASB and the International Accounting Standards Board established a working group to study ways financial reporting could be improved. Since then, the FASB has worked through three separate requests for comment, 3,360 comment letters, and more than 220 meetings with financial institutions, regulators, auditors, and accountants.

The rule proved to be a hard sell because it asks financial institutions to value a loan as "the net amount expected to be collected." In other words, the FASB wants credit unions and banks to "immediately record the full amount of credit losses that are expected in their loan portfolios," FASB Chairman Russell G. Golden said in a news release.

Golden went on to say the new standard "aligns accounting with the economics of lending," and would result in significantly improved financial reporting.

Financial trade groups have described CECL as the most significant change to bank accounting practices in history, but they responded to the final rule with cautious optimism.

"Based on our initial look at the final standard, it appears that the hard work of CUNA and our member credit unions helped bring about the final version of the standard that will make compliance much more manageable to credit unions," said CUNA Deputy Chief Advocacy Officer Elizabeth Eurgubian. "While we continue to disagree with FASB's decision to apply the new standard to credit unions, we recognize that the final standard reflects input provided to the FASB Board and staff by CUNA and the credit union industry."

In January, one of the big concerns was whether lenders would be required to use costly complex modeling to develop the loan loss forecasts that the rule requires. FASB stated in the rule that modeling is not required and that financial institutions may use their customary methodologies and tools to calculate their allowance for loan losses under CECL.

According to the standard, FASB "does not specify a method for measuring expected credit losses and allows an entity to apply methods that reasonably reflect its expectations of the credit loss estimate." Additionally, it states, "an entity can leverage its current systems and methods for recording the allowance for credit losses. However, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts."

In a joint statement issued by the Office of the Comptroller of the Currency, the Federal Reserve, and the Federal Deposit Insurance Corp., federal banking regulators said they expected CECL "to be scalable to institutions of all sizes." They added that they did not expect complex modeling would be necessary.

According to the statement, "the agencies expect that smaller and less complex institutions will be able to adjust their existing allowance methods to meet the requirements of the new accounting standard without the use of costly and complex models."

Regulators also ruled out a requirement that institutions use third-party vendors as part of their compliance. 

A concern that continues to worry many is that the rule's forward-looking requirements will result in significant additions to financial institutions' loan loss reserves.

In the June issue of the NCUA Report, NCUA board member J. Mark McWatters, who's also licensed as a certified public accountant, noted fears that credit unions' allowance for loan losses "will need to be significantly increased, at least initially. ... This is an issue that federal regulators must take seriously."

Given the controversy that has surrounded the rule, the FASB is allowing for a long phase-in period. Financial institutions that file with the Securities and Exchange Commission won't have to begin to use CECL for annual and quarterly reports until after Dec. 15, 2019. Thus, for a company that reports on a calendar-year basis, the standard would be effective Jan. 1, 2020.

For stock companies that are not SEC filers, it becomes effective a year later. For nonpublic filers, such as credit unions and mutual banks, CECL goes into effect for end-of-year reporting in 2021 and quarterly reporting in 2022. Companies will be able to opt for voluntary early adoption starting in December 2018.