Bank Regulators Encourage Early Implementation of New Credit Loss Standards
On June 16, 2016, the Financial Accounting Standards Board adopted new credit loss standards for financial institutions: Accounting Standards Update (ASU) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument. These new standards represents a significant change from the existing incurred-loss model that requires banks to mark down loans only after borrowers have defaulted.
Regulators have urged banks to apply the standard as soon as reasonably practicable, as banks will have to adjust to recording the full amount of their expected losses on the day loans are originated or securities purchased. Regulators have stressed that full implementation will require company-wide commitment and coordination among credit risk management, accounting, underwriting, treasury, internal audit, and long-term capital planning departments.
The ASU on credit losses will take effect for SEC filers for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. For "public" companies that do not file reports with the SEC, the ASU on credit losses will take effect for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years. For all other organizations, the ASU on credit losses will take effect for fiscal years beginning after December 15, 2020, and for interim periods within fiscal years beginning after December 15, 2021. Early application will be permitted by all organizations for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018.
Banks have criticized the accounting change because it will force earlier recognition of losses and hurt short-term earnings. Smaller and community banks unsuccessfully lobbied for an exemption, saying the standard will be too costly for them to apply.
Joanne Wakim, chief accountant of the Federal Reserve Board, sought to dispel what she said were misconceptions about the standard, and reinforced that agencies are not requiring a particular method for estimating losses.
"We are allowing whatever you decide," she said. "The standard is flexible, and we are flexible in terms of methodologies to accomplish the goal."
She said she expected banks of different sizes and degrees of sophistication to implement the standard in different ways.
"We train examiners to expect diversity," she added. "We don't believe one size fits all."