The $2.2 trillion package passed by the Senate on Wednesday night includes a provision that would allow banks the temporary option to delay compliance with the credit losses accounting standard until either the end of the year or the end of the coronavirus national emergency, whichever comes earlier.
Banks and credit unions have long sought to delay the effective date of the credit losses standard, also known as the CECL standard for the Current Expected Credit Loss model it follows, and there was speculation that the Financial Accounting Standards Board would need to adjust the standard because of the COVID-19 pandemic (
The CECL standard was originally set to take effect in January 2020 for SEC filers, except for smaller reporting companies (defined as those with a public float of less than $250 million; or annual revenue of less than $100 million and either no public float or a public float of less than $700 million), which are supposed to begin implementing it in January 2021. The changes announced last year would push back the dates for smaller reporting companies and all other public business entities from January 2021 to January 2023, and for private companies and nonprofits from January 2021 to January 2023.
The stimulus package now making its way through Congress, known as the CARES Act, would delay the standard until the end of the year, or the end of the national emergency, whichever comes first.
John DelPonti, managing director of Berkeley Research Group, believes the change will be welcome to the banking industry.
“This is a welcome reprieve for those banks impacted by CECL,” he said. “Given the need for everyone to focus on the safety of their employees and helping customers in need, this appropriately eliminates a very difficult task and reduces additional volatility associated with the standard by delaying its implementation.”
The legislative text is under a provision for temporary relief from CECL standards: “Notwithstanding any other provision of law, no insured depository institution, bank holding company, or any affiliate thereof shall be required to comply with the Financial Accounting Standards Board Accounting Standards Update No. 2016–13 ('Measurement of Credit Losses on Financial Instruments'), including the current expected credit losses methodology for estimating allowances for credit losses, during the period beginning on the date of enactment of this Act and ending on the earlier of the date on which the national emergency concerning the novel coronavirus disease (COVID–outbreak declared by the President on March 15 2020 under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates; or December 31, 2020.”
FASB hasn’t yet issued a statement because the bill hasn’t been signed into law, but a spokesperson pointed to a letter sent Monday by Kathleen Casey, chair of the Financial Accounting Foundation’s board of trustees, which oversees FASB, in which she objected to the proposed legislative language. “Those who have raised objections to the implementation of the standard are primarily concerned about the effect it has for some banks on their regulatory capital,’ she wrote to Republican and Democratic congressional leaders in the Senate and the House. “This concern can be addressed directly by the regulators themselves without requiring any change to CECL or its effective dates. Further, the banking regulators have signaled that they are actively working to address these concerns.”
“It is the very urgency behind Congress’s response to the pandemic that also cautions against rashly adopting unprecedented measures that would act to diminish confidence in generally accepted accounting principles (GAAP), financial reporting and our markets during this critical time,” she added.
Another provision that was in the bill would also suspend compliance with FASB guidance on troubled debt restructurings, or TDRs, to which Casey also objected. She noted that on Sunday, the prudential banking regulators announced guidance to provide greater clarity in accounting for TDRs that was worked out through collaboration with FASB staff. “In response to this announcement, the FASB announced its support for the new guidance and reaffirmed FASB’s readiness to support stakeholders in resolving any questions they may have. As a result, the draft provision in the bill concerning TDRs is moot,” she wrote.
The bill provides the banks that were supposed to have CECL in place by January 2020 “optional temporary relief.” It doesn’t apply to the privately held banks that have until January 2023. Banks can choose whether to apply CECL, or they can retain the incurred loss model they had been using.
There are several reasons why banks are against the idea. Many large banks have already implemented CECL compliance and are not likely to put aside their work. The smaller banks that already had the deferred effective date would lose out on that option if they had to apply CECL bv the end of this year. The temporary nature of the delay would mean they might have to start using CECL as soon as the Department of Health and Human Services decides the crisis is over. Some regulators and investors also want to know about the banks’ loan losses and rising credit risk amid the economic slowdown.
For regulatory capital purposes, last year the regulators provided a three-year phase-in period for a 30 percent transition adjustment, allowing banks to choose whether they want to phase in CECL. But if they don’t adopt CECL, they lose that phase-in. Investors and financial analysts are likely to want to know from the banks who didn’t adopt CECL what the difference would have been if they had.
FASB's sister organization, the Governmental Accounting Standards Board, which is also overseen by the FAF, said Thursday it is considering delaying the effective dates of some of its standards and implementation guides, particularly for leases and fiduciary activities, because of the COVID-19 pandemic (
Despite the problems likely to be encountered with implementing the legislation, it is on a fast-track to approval as it now moves to the House given the desperate situation caused by the pandemic, despite misgivings among some lawmakers and the possibility that amendments may be introduced in the House.
“With respect to the Senate legislation, it will likely be enacted quickly,” said Ariste Reno, a managing director at Protiviti. “Banks should carefully consider the decision to continue with CECL or to revert to the incurred loss approach under previous accounting guidance for upcoming public filings.”
She noted that most large public filer banks are currently better positioned to estimate loss reserves using the CECL approach since they have made large investments building up to implementation for several years and it would require some work to revert to the incurred loss approach. But outside auditors may need more time to review the loss reserve calculated under the incurred loss framework, as well as the control environment around that process.
“Recent conversations with clients reveal that most large banks, as of this week, intend to move forward with CECL until further notice given the investment in CECL, a desire to meet analyst expectations relative to previous CECL communications, and that for some the incurred loss approach has been effectively decommissioned since Dec. 31, 2019,” said Reno. “Additionally, banks may be more inclined to stick with CECL because they are leery of the current language in the Senate bill that in effect presents additional uncertainty. It refers to optional deferral of CECL until a conditional end date that could come relatively quickly — the earlier of '(1) the date on which the national emergency concerning the novel coronavirus disease (COVID–19) outbreak declared by the President on March 13, 2020 under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates; or (2) December 31, 2020.' However, the crisis environment may result in further political and regulatory pressure that could impact where banks stand today.”
