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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 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.
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