Bankers: Revised FASB Loan-Loss Proposal an Improvement

By Steve Burkholder

April 1 — Community bankers and federal bank regulators said revised proposals for upcoming rules on accounting for loan losses, and other credit losses, could lead to a more flexible and workable standard than an earlier version.

The new standard will have a big impact on reporting by many banks and other financial institutions. It is expected to lead to earlier recognition of larger amounts of loan losses and of associated reserves.

The Financial Accounting Standards Board's standard is set to be issued mid-year. The standard was the subject of the first public meeting April 1 of the Board's new Transition Resource Group for Credit Losses.

FASB plans to meet again on the topic in late April to consider advancing the planned rules to final draft. The board also expects to formally vote to make sure benefits of the new accounting standards update outweigh its costs. Moreover, FASB will seek to affirm the 2019 effective date—for public companies—or perhaps defer the timing, if board members believe a delay is warranted.

Insufficient Warning With Incurred Losses

The 2008-2009 financial crisis spurred the FASB standard as banks were seen as recording loan losses “too little, too late.”

Current, long-standing rules are built on a notion of incurred losses, rather than expected losses.

FASB Chairman Russell Golden, told Bloomberg BNA that the April 1 meeting confirmed that the board's recent improvements showed that the impairment model is operational.

The board would be working on improving wording in a key paragraph on estimating expected credit losses (ASC 326-20-30-09), which was the subject of extended discussion by the TRG, he said.

More Cordial Meeting

The two-hour meeting April 1 proved more cordial than a February board roundtable on the planned ASU .

Two months ago, delegates from Independent Community Bankers of America said that FASB wasn't heeding the concerns of small bankers about the forthcoming “current expected credit loss” model, the linchpin of the new ASU. They added that they had concerns about the model, and they predicted it would place hardships on some 6,000 smaller financial institutions.

Timothy Zimmerman, chief of a community bank in Monroeville, Pa., said April 1 that the revised wording of the nearly completed rules, and the specific questions for the TRG meeting suggesting some leeway in calculating expected credit losses, “clearly show that there's an intent to make this standard flexible and scalable.”

“We think that this draft validates what we've been doing in practice, while it adds the ability to provide for expected credit losses,” Zimmerman said. “However, it doesn't require to use reserves and to increase reserves if an increase isn't really appropriate, and allows us to use historical loss data where appropriate.”

Regulators See Improvements

Federal banking regulators also sounded positive. They built on their views, expressed at the February roundtable, that they didn't expect to require small banks to upgrade their systems to more complicated computer-driven models to assess expected losses in the smaller institutions' portfolios of varied loans.

Jeffrey Geer, associate chief accountant at the Office of the Comptroller of the Currency, said the new draft of the FASB credit impairment standard “is a significant improvement over earlier drafts in terms of understandability and addressing stakeholder concerns about operationalability.”

Geer said he believes he spoke for OCC accountants and the other regulators of financial institutions in offering his comments.

“The document is very clear now and it's going to be a lot easier to implement.”

First Niagara Bank's chief of accounting, Kevin Stoklosa, said he agreed with Geer. “The document is very clear now and it's going to be a lot easier to implement,” he said.

Robert Storch, chief accountant at the Federal Deposit Insurance Corporation, told Bloomberg BNA that the refined wording of the planned standards “does make it clear that multiple approaches” to assessing expected credit losses “are acceptable.” Storch noted Zimmerman's and others' positive words about the new rules being seen as workable.

Need for Specific Auditing Standards?

Robert Wadley, a national accounting partner at Ernst & Young LLP, suggested there might be a need for specific auditing standards pegged to oversight of reporting under the forthcoming rules on impairment. The Public Company Accounting Oversight Board writes U.S. auditing standards.

Barbard Vanich, a PCAOB associate chief auditor, noted Wadley's and others' comments. She told Bloomberg BNA later that PCAOB is monitoring international auditing rulemakers' study of possible rules aimed specifically at auditing relatively new, international financial reporting standards on credit impairments.

To contact the reporter on this story: Steve Burkholder in Norwalk, Conn., at sburkholder@bna.com

To contact the editor responsible for this story: Steven Marcy at smarcy@bna.com