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Federal Regulators Issue FAQs on New Credit Losses Accounting Standard

On June 16, 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2016-13, Topic 326, Financial Instruments – Credit Losses, which implemented the current expected credit losses methodology (CECL) for estimating allowances for credit losses. This new accounting standard applies to all banks, savings associations, credit unions and financial institution holding companies, regardless of size, that are required to file regulatory reports that conform to US generally accepted accounting principles (GAAP).

On December 19, 2016, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency jointly issued frequently asked questions (FAQs) to assist institutions and examiners in implementing this new accounting methodology. These regulators also plan to periodically publish additional FAQs and/or update the existing FAQs.

The FAQs focus on the application of the updated CECL methodology and related supervisory expectations. The FAQs also reiterate that for Securities and Exchange Commission–registered Public Business Entities (as defined in GAAP), the new standard is effective in 2020, while for all other financial institutions the new standard is effective in 2021.

The following list highlights key points from the FAQs:

  • CECL applies to all financial assets carried at amortized cost, including loans held for investment and held-to-maturity debt securities, and certain off-balance-sheet credit exposures such as loan commitments and standby letters of credit. Although CECL does not apply to available-for-sale debt securities, the new accounting standard modifies the existing accounting for impairment on such securities.
  • The FAQs address such topics as changes the new accounting standard makes to existing US GAAP, the standard’s effective dates, the application of the standard upon initial adoption, acceptable allowance estimation methods under CECL, and portfolio segmentation for credit loss estimation on a collective basis.
  • The FAQs reiterate that CECL is scalable to institutions of all sizes; community institutions are not expected to need to adopt complex modeling techniques to implement the new accounting standard; and institutions are not required to engage third-party service providers to assist management in estimating credit loss allowances under CECL.
  • Institutions are encouraged to plan and prepare for the transition to and implementation of the new accounting standard, including its potential impact on regulatory capital. The FAQs provide examples of initial implementation activities. The agencies expect institutions to make good faith efforts to implement the new accounting standard in a sound and reasonable manner.

The federal regulatory agencies stated that they will continue to work together to ensure consistent and timely communications, training, and supervisory guidance.

The FAQs are available here.

©2022 Katten Muchin Rosenman LLPNational Law Review, Volume VII, Number 6
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About this Author

Our Financial Services Practice advises a broad spectrum of domestic and international fund managers, trading advisors, banks, brokerages and proprietary trading firms in all aspects of exchange-traded and over-the-counter commodities, securities and derivatives transactions. We help clients find business-based solutions and make business-driven decisions that are in compliance with applicable regulatory requirements. Our lawyers have extensive experience in the financial markets and are fully attuned to the need to provide advice quickly and efficiently in light of the time-sensitive and...

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