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FASB Proposes to Extend CECL Implementation Deadlines for Certain Institutions

The FASB is standing by CECL and its decision to require companies to proactively report and set aside reserves for credit losses, saying the move would make the financial system safer and is worth the cost. As part of its ongoing review of the contentious standard and ongoing controversy, the FASB voted this week to extend the deadline for CECL implementation until January 2023 for small reporting companies, as defined by the SEC, and private institutions. SEC reporting companies who are not considered small reporting companies still must comply by January 2020. FASB plans to publish the proposed changes in mid-August, followed by 30-day public comment period.

However, deadlines may move yet again. In May, Republicans on the Senate Banking Committee introduced a bill that would require the SEC to study the impact CECL would have on credit availability, regulatory capital and U.S. competitiveness for financial institutions of varying sizes. Then, in mid-July, a House bill with bipartisan support that would also require the SEC and other federal agencies to study the impact of CECL before it takes effect was introduced.

Russ Golden, chairman of FASB, noted in a recent interview with American Banker that there are three ways to account for losses: Current GAAP delays recognition of a credit loss until it's likely a loss has been incurred; loan-loss accounting could also be done ratably, but most loan losses are not incurred evenly over time; or the accounting could be done up front with CECL.

Golden argues that CECL is more “forward looking” than looking in the rearview mirror because it requires management’s best estimates of expected credit losses, more timely reporting of credit losses, more information on credit quality indicators and portfolio composition, and a decrease in costs for financial statement users because credit losses would be reported based on expectations. The FASB maintains that if CECL had been in place as the financial crisis unfolded, institutions would have had to recognize loan losses more quickly and regulators would have understood the magnitude of the problem earlier. This, then, would have provided an opportunity to take corrective action and might have eased the extent of the crisis.

Opponents counter that CECL costs would be too high, including expenses to gather data, incorporate new processes, train employees, review and audit the new information, and educate investors about the change in accounting reporting. They also say it would discourage lending. Plus, financial institutions would likely need to increase loan loss reserves, potentially negatively impacting profits. It’s interesting to note this could negatively impact bank executives’ future compensation.

To help bank executives navigate the changing CECL landscape and prepare for what’s ahead, the FASB will host a series of educational workshops at locations across the country, and issued an update to address more than a dozen FAQs related to CECL, including:

  • Use of historical information
  • Making reasonable and supportable forecasts
  • The reversion to historical loss information

Click here to read the FASB FAQs

Sources: American Banker, FASB, Wall Street Journal, Accounting Today

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