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FASB Anticipates June Release for Credit Loss Standard; Community Banks Weigh In

The Financial Accounting Standards Board (FASB or the Board) is set to release a final standard for loans and securities write-downs at the end of June. Before it releases its final amendments to U.S. GAAP, the Board will likely meet again to weigh the upcoming standard's costs and benefits.

"Our hope is that we issue the standard by June 30," FASB member Lawrence Smith told an April 1, 2016, meeting of an outside panel advising the accounting Board on the standard's implementation. The Board also plans to meet to weigh the planned standard's costs and benefits and reconsider the 2019 effective date for public companies.

The standard has been at an advanced stage of publication for close to a year. In September 2015, the Board conducted a closed-door session of the advisory panel, called a Transition Resource Group, or TRG, to review an internal draft of the final standard. The latest version of the accounting amendments were made publicly available a week before the advisory panel meeting.

During a February 4 roundtable, community bank executives told the FASB that they are worried that the new guidance will significantly increase reporting required for evaluating loans and securities and subject them to harsher scrutiny from auditors and regulatory examiners.

The FASB is planning to release the accounting changes as a new topic in its Codification of U.S. GAAP, Topic 326, Financial Instruments — Credit Losses. The new topic will provide guidance for measuring the expected credit losses on financial instruments measured at amortized cost and debt securities that are classified as available-for-sale.

The draft version of the amendments from the FASB said the amortized cost instruments in Subtopic 326-20 include:

  • Financing receivables,

  • Held-to-maturity debt securities,

  • Receivables that result from transactions within the scope of Topic 605, Revenue Recognition, and Topic 606, Revenue From Contracts With Customers, and

  • Reinsurance receivables covered by Topic 944, Insurance.

Much of the April 1 session was devoted to the new guidance in ASC 326-20-30-9, Financial Instruments — Credit Losses — Initial Measurement — Developing an Estimate of Expected Credit Losses, which was singled out because of its importance to the credit loss accounting model. The paragraph calls for making a forecast of the expected losses and incorporating historical data into the forecast when needed. The guidance states, in part:

"An entity is not required to develop forecasts over the contractual term of the financial assets if those forecasts are not supportable. Rather, for periods beyond which the entity is able to make or obtain reasonable and supportable forecasts of expected credit losses, the entity shall revert to historical loss information. Historical loss information can be internal or external historical loss information — or a combination of both — and shall reflect the historical loss information over an economic cycle."

TRG meeting participants generally supported the new accounting, and credited the FASB for its work in recent weeks to write a standard that does not disrupt business activities.

"There is an intent to make this standard flexible and scalable and to allow community banks to use their experience and understanding of the local business marketplace to meet the requirements of the new standard and ascertain the most appropriate allowance for loan and leases losses," said Timothy Zimmerman, president and CEO of Standard Bank in Monroeville, Pennsylvania. "We think this draft validates what we've been doing in practice." Smaller financial institutions have lobbied the FASB for delaying the standard's publication and making changes to it.

Shortly after the meeting concluded, the Independent Community Bankers of America, the lead trade group for community banks, said it supported the FASB's recent changes to the standard.

The FASB has stated it is not attempting to write a standard that locked banks and other companies into one method for reserving against all financial losses.

"We're not trying to pen you into one way of doing it. We're trying to say, here are some things you should consider," Smith said.

© 2020 Jones Walker LLPNational Law Review, Volume VI, Number 147



About this Author

Peter Rivas, Jones Walker Law Firm, Banking and Financial Services Attorney

Peter Rivas is a partner in the firm's Banking & Financial Services Practice Group. He counsels clients on a wide range of corporate and securities matters, including mergers and acquisitions, public and private securities offerings, SEC reporting obligations, and corporate governance matters. He regularly represents bank holding companies, commercial banks, savings and loan holding companies, and savings banks on regulatory matters. Mr. Rivas also advises financial institutions with respect to various federal and state corporate and compliance matters.