The Financial Accounting Standards Board (FASB) issued a new expected credit loss accounting standard in June 2016. This new standard introduces the current expected credit losses (CECL) methodology for estimating allowances for credit losses. The standard is effective for U.S. Securities and Exchange Commission (SEC) filers in fiscal years and interim periods beginning after December 15, 2019. For public business entities that are not SEC filers, the standard takes effect in fiscal years and interim periods beginning after December 15, 2020. For non-public business entities, it becomes effective in fiscal years beginning after December 15, 2020.
Since CECL’s introduction, it has been met with backlash, specifically from the financial services industry. In recent months, a bipartisan protest has decried the adverse effects of FASB’s CECL accounting standard on banks and their customers during times of economic stress. Representatives Roger Williams (R-Texas) and Vicente Gonzalez (D-Texas) have called for delayed implementation of the standard until the full economic effects can be understood, citing data provided by the American Bankers Association (ABA) indicating that during periods of economic stress, CECL would cause significant spikes in loan loss reserves. The ABA’s concerns are primarily focused on the procyclical effects of the standard.
On May 21, 2019 Senator Thom Tillis (R-N.C.) introduced Bill S. 1564 to the Senate, calling for a delay of the implementation of FASB’s CECL standard until the completion of a quantitative impact study that fully details its likely effects on the economy.
The Bill calls for a quantitative study of:
The potential impact that the implementation of CECL may have on the availability of credit, with a particular focus on the impact of that availability:
for consumers and small business concerns
with respect to the credit products that consumers and small business concerns rely on during periods of economic expansion and during recessions;
Whether implementing CECL could:
accelerate the depletion of regulatory capital that is available for lending purposes during a recession
have a greater impact on regulatory capital or extend the period in which regulatory capital is reduced during a recession
pose any other systemic risks to the economy of the United States;
The potentially disproportionate impact that the implementation of CECL may have on financial institutions, taking into account:
the various sizes and levels of complexity of those financial institutions
the different amounts of resources that are available to those financial institutions;
The potential impact that the implementation of CECL may have on decisions made by investors; and
The potential competitive impact that CECL’s implementation may have on institutions in the United States as a result of the differing international accounting standards used to measure credit loss.
The Bill calls for the SEC and Federal financial regulators to submit a report to the FASB and appropriate committees of Congress detailing the results of the study, including the identification of any negative impacts resulting from the implementation of CECL and any recommendations for changes to eliminate or mitigate the negative impacts. The report is due no later than one year after the date of enactment. During this time, neither the SEC nor any of the Federal financial regulators may require a person to comply with CECL.
Until the new standard becomes effective, institutions should continue to follow current U.S. GAAP guidelines along with related supervisory guidance on the allowance for loan and lease losses (ALLL). For more information regarding Bill S. 1564 or CECL implementation, please contact your local Schneider Downs representative.
You’ve heard our thoughts… We’d like to hear yours
The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].
Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.