• Colin Doyle CFO

FASB change helps banks adjust to credit loss standard

The Financial Accounting Standards Board’s proposed changes to the credit loss standard promise to help private banks and credit unions deal with the transition on a more comfortable timeline.

FASB released a proposed accounting standards update this week to amend the transition requirements and scope of the credit losses standard. One of the changes involves a timing problem for when the current expected credit loss, or CECL, standard takes effect. Private banks and credit unions have been complaining about a problem with the effective date of the standard, which comes at an awkward time of year. FASB voted to propose the change late last month.

The proposal would mitigate some of the complexity of the transition by requiring entities other than public companies to implement it for fiscal years starting after Dec. 15, 2021, including interim periods within those fiscal years. That change would align the implementation date for their annual financial statements with the implementation date for their interim financial statements. Publicly traded companies that are SEC filers are supposed to implement the standard for fiscal years beginning after Dec. 15, 2019, and for public companies that aren’t SEC filers after Dec. 15, 2020.

“I think that’s going to be really helpful for both the preparers — the banks themselves — as well as for investors, because it just helps with consistency,” said Mike Lundberg, a partner and national director of financial institutions at the accounting firm RSM. “As the implementation adoption date was originally written, a bank would have to file their quarterly regulatory reporting under the old rules. For the first three quarters, they would file their call reports with the banking agencies for March, June and September under the current rules. Then October 1, they would have had to reverse all of that accounting for the first nine months, the first three quarters, adopted the rule change — the new CECL standard — as of January 1, and then redone their loss reserve accounting for the year to implement it for the end of the year. That transition was going to be just a little counterintuitive and cumbersome for them. Now there will be a cleaner transition, so that all of the year will be under the same accounting requirements.”

The change will also give private banks and credit unions more time to adjust to the credit loss standard than publicly traded companies, just as they do with FASB’s revenue recognition and lease accounting standards.

“They have a longer runway or a longer implementation period than public companies and public business entities,” said Lundberg. “Under the old rule, they would have had to implement it in Q4, and under the new rule they’ll implement it for Q1 of the next year. It’s really technically just a quarter delay, but streamlines the process quite a bit.”

The proposed update would also clarify that receivables arising from operating leases are not within the scope of the credit losses standard, but instead should be accounted for in accordance with the lease accounting standard.

“I think it’s more of just a minor tweak, just kind of a clarification with the leasing applicability,” said Lundberg. “It’s certainly helpful and a good clarification, but I think that the biggest impact here really is cleaning up the transition rules for non-PBE [public business entity] banks and credit unions. There are thousands of those. In terms of the actual number of entities, that’s the bulk of community banks and credit unions in the U.S. It’s a minor delay in the reporting, but it’s meaningful in keeping the bank on the same loss reserve model for the whole year, as opposed to having to change mid-year.”

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