FDIC officials this week encouraged financial institutions to provide feedback by May 31 to the Financial Accounting Standards Board (FASB) on the board’s proposed new model for accounting for credit losses. During a teleconference on Thursday, officials in the FDIC’s Division of Risk Management Supervision described some key differences between current practices and the proposed current expected credit losses, or CECL, model. They also outlined uncertainty surrounding when the changes might be implemented.
Known as the CECL model, the proposal would mean that there would no longer be a “triggering event” for measuring a credit loss. Instead, credit losses would be recognized based on an estimate of the amount of contractual cash flows not expected to be collected on the institution's assets held at the reporting date, said Robert Storch, the division’s chief accountant, and Gregory Eller, deputy chief accountant.
“There’s no threshold,” Eller said. “It’s simply a recognition from day one of the credit loss inherent on the assets on the balance sheet.”
“The proposed change could mean that virtually any credit deterioration would affect a bank’s financial performance and financial position, rather than requiring credit deterioration to build to the point where an incurred loss is probable before the deterioration affects the reported financial results,” slides accompanying the presentation said.
The range of information that should be incorporated into the measurement of credit losses would also be broadened. “Under current GAAP, banks estimate credit losses based on information about past events and current conditions,” according to the FDIC presentation. “Under the CECL model, ‘reasonable and supportable’ forecasts that affect expected collections on financial instruments also should be considered.”
The FDIC officials also acknowledged that they will have to provide education and training to examiners and banks on the changes. Storch said he expects updated guidance on supervisory policies would be issued “so bankers would have a feel for what we expect them to do under the new standards.”
There’s going to be a learning curve for the bankers and regulators as the “reasonable and supportable” forecasts are built, he added. “The documentation of the banks’ implementation will go a long way to helping the examiners understand their thought processes.”
Storch and Eller acknowledged it could be anywhere from 2015 to 2018 before the FASB proposal is implemented.
FASB has made several changes to the proposal, and the comment deadline had been extended from April 30 to May 31. But, Eller said, “I get the sense they’re about ready to put their pencil down, and any changes may be around the margins or pulling together of FASB and IASB.”
At the same time, the pervasive changes represented by the proposal could require a lengthy transition period.
“We’re looking at this as something of a Y2K project, since it does represent a significant change from current practice and would require the development of new data or mining through data to estimate timing and the amount of cash flows not collected,” Eller said. “That is a significant undertaking. Not only the data collection but establishing robust systems that are up to the task of supporting the financial reporting.”
FDIC officials noted that an earlier FASB change related to derivatives provided a transition period of about three years. “This is a much more pervasive change in the standards, touching every bank that makes a loan or has a security,” Eller said. “I’d think the implementation would reflect that, so maybe 2018 is more appropriate.”
The FDIC said it would have a transcript of the call on its website later this month. Slides from the presentation are available here.
If you are interested in commenting on the proposal, it is important to review how to draft a comment letter and to submit it prior to the May 31 deadline.
For more information on FASB’s CECL model and the impact it could have on financial institutions, download the whitepaper, FASB’s New CECL Model: How it impacts your ALLL.