Do you want to see your credit impairment allowance double? If not, you must comment by May 31 in response to the latest Financial Accounting Standards Board (FASB) proposal. FASB issued a proposal for a "current expected credit loss" (CECL) model that would utilize a single "expected loss" measurement for the recognition of credit losses.
Do you want to see your credit impairment allowance double? If not, you must comment by May 31 in response to the latest Financial Accounting Standards Board (FASB) proposal. FASB issued a proposal for a "current expected credit loss" (CECL) model that would utilize a single “expected loss” measurement for the recognition of credit losses.
This new model would effectively replace the existing impairment models in the United States' generally accepted accounting principles (GAAP) that primarily use an "incurred loss" approach.
Under this new model, credit unions would estimate the cash flows they do not expect to collect, using all available information, including historical experience and forecasts about the future. The proposed CECL approach considers more forward-looking information than is currently permitted under GAAP.
Credit unions are urged to:
Voice concerns that the proposal could double or triple a credit union's impairment allowance, resulting in a reduction in many credit unions' retained earnings;
Explain that a decrease in earnings can lead to a reduced capital ratio, which could trigger prompt corrective action (PCA) implications for numerous credit unions that do not currently have PCA concerns;
Voice concerns that the proposed "expected loss" approach would require use of speculative forecasting of the performance of an asset over the remainder of the asset's life;
Explain that the expected credit loss approach has the potential to lead to quarterly adjustments in expected loss projections, possibly resulting in more volatility in provision expense and earnings;
Explain the cost of compliance to the credit union and ultimately credit union member-owners; and
Urge FASB to exempt credit unions from the proposed changes based on their unique structure as private, not-for-profit, cooperatively owned, financial institutions.
More details of the FASB proposal can be found here.