FASB rejects regional bank proposal, reverses course on vintage disclosures
Mary Ellen Biery
The Financial Accounting Standards Board has made two decisions that will limit changes to the current expected credit loss standard, or CECL, ahead of implementation. SEC-registered banks must comply with CECL in Q1 2020; all other financial institutions have until the following year or later.
In the first decision, the board rejected Wednesday a request made by 21 regional banks to consider changing how CECL’s impacts would be recorded in financial statements. In the second, the board reversed course on its plan to clarify that the standard requires gross write-offs and gross recoveries be presented within vintage disclosure tables. Both decisions came during the board’s April 3 meeting.
The banks, in a Nov. 5 letter, had asked FASB to split up provisions for expected credit losses on performing loans — with the first 12 months of expected credit losses presented in net income as a provision expense and the credit losses expected beyond the first 12 months presented in other comprehensive income. This would have meant a portion of reserves for expected credit losses on performing loans wouldn’t have to be charged against net income and Tier 1 capital, as they are currently under CECL. (Expected credit losses for impaired loans would have been recorded in the income statement as a provision expenses under the proposal, as they are under CECL.)
FASB members agreed with feedback from both large and small banks, as well as the board’s staff, that the proposal didn’t represent an improvement while it could add more cost and complexity. Other board members said they supported the idea, but not the specific proposal. “I support the notion of splitting, but if we moved forward with it, this wouldn’t be the proposal we’d move forward,” said board member Hal Schroeder.
FASB at its meeting also agreed that, for now, the CECL standard wouldn’t include a requirement to present gross write-offs and gross recoveries within vintage disclosure tables. However, board members agreed to continue researching the topic and may revisit the issue formally after implementation.
The issue arose because the standard had not included language specifically requiring entities to present gross recoveries and gross write-offs by origination year in disclosures. However, an illustrative example provided in the standard had shown the disclosures by vintage year.
Board member Marsha Hunt said feedback from preparers indicated they weren’t in a position to provide the information when the standard is implemented because they didn’t understand that the disclosure was required. “That left me with the impression that it was not clear at the time,” she said. She also said preparers expressed concern about the additional costs involved.
FASB staff agreed that based on stakeholder feedback, the guidance was unclear. Based on longstanding tradition, it recommended the board allow financial institutions to apply the requirements as stated in the language of the standard rather than the illustrative example, and the board agreed.
However, several board members said this information would be useful, so they directed the staff to continue researching the potential costs and benefits of providing it to reconsider it later.
FASB expects to post a recording of the meeting and a written copy of its tentative decisions on its website.