FASB Advances Loan Loss Rules; Defers Effective Dates

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April 27 — The Financial Accounting Standard Board decided to allow companies one more year to comply with important forthcoming rules on accounting for loan and other credit losses, which are expected to have a major impact on the banking industry.

Larger banks and other public companies must apply the new standard in January 2020, rather than the earlier planned effective date of January 2019. Companies that don’t file financial reports with the U.S. Securities and Exchange Commission will have until January 2021 to adopt the new rules under a decision FASB took April 27. Smaller private entities, including not-for-profit organizations, would also have until January 2021 to apply the rules for their annual reporting, and until January 2022 for interim-period reporting only.

Disclosure Relief

FASB also provided relief for smaller banks in establishing five years worth of “vintage disclosures” of loan information, which larger banks must have in place when the new rules take effect for them in 2019.

FASB hopes to issue the loan- and credit-loss standard in June.

The planned standard, some seven years in the making, was spurred by the financial crisis of 2008-09. FASB intends for the new rules to head off the “too little, too late” reporting of loan losses seen after the global meltdown of credit markets.

Decides Benefits Outweigh Costs

FASB decided on the one-year deferrals, and a similar one-year delay for private enterprises, after five members of the seven-member board laid out their reasons for how the benefits of the planned standard on impairment of financial instruments outweigh the costs of implementation.

If four members of the board had voted the other way—instead of only FASB Vice Chairman James Kroeker and colleague Lawrence Smith—the new, long-brewing rules wouldn't reach fruition. Kroeker and Smith agree with their colleagues on how to measure credit losses, but not on how to recognize those.

The recognition prescriptions favored by FASB's majority doesn't faithfully represent the economics of lending, Smith said. Kroeker said: “I actually don't believe that you incur a loss at origination for loans that are bought at fair value or for loans that are originated with due diligence in underwriting where the interest rate that is charged reflects the underlying risk.”

IASB, FASB Out of Sync

The International Accounting Standards Board issued its own, different set of rules on credit losses and impairments in 2014 (10 APPR 693, 8/1/14). Those become effective Jan. 1, 2018.

IASB and FASB had worked jointly for years on the impairment part of their multi-faceted financial instruments project, but parted ways on FASB's recipe for what the London-based board sees as the inappropriate recognition of credit losses, or the accounting at origination of loans.

Both boards base their new rules on expected credit losses, they state, and estimations built on companies' readings of reasonable and supportable evidence of economic conditions and events affecting credit and loan repayments.

The new blueprint replaces models built on incurred losses and triggering events, or a hybrid of incurred losses and expected losses. One FASB member, Marc Siegel, called the current accounting “broken.”

‘Flexible, Scalable' for Different Bank Sizes

FASB Chairman Russell Golden, who voted in the majority, described what he and four board colleagues view as marked improvements to accounting for loan and other credit losses.

Golden described FASB's “current expected credit loss” model for impairment as “flexible” and “scalable to banks of all sizes.”

Federal banking regulators, at recent meetings with FASB and representatives of both larger banks and smaller, community banks, concurred with the standards board that the planned rules wouldn't necessarily require complex, computer modeling of loan portfolios.

FASB members suggested that Excel spreadsheets could do the job, provided the reporting meets the requirements of auditors and the panel that sets standards for them, the Public Company Accounting Oversight Board.

The board chairman reiterated, as other FASB members have suggested, that “there's no requirement to do discounted cash flows” or other complicated analyses of lending activities. However, that flexibility has a cost, Golden added, in that different methods will yield different bank-to-bank estimations, as Smith also suggested.

“We tested that with the regulators,” Golden said. “We tested that with the users” of financial statements and with members of the new Transition Resource Group on impairment. “And we got formal agreement from them that this is a flexible approach, and it is specifically designed that way to minimize” costs of applying the standard, he said.

Relief on ‘Vintage Disclosures.'

After some debate, FASB also decided April 27 to ease the burdens of smaller banks in making what are known as “vintage disclosures.”

Such footnote reporting includes information on a loan's credit quality indicators by year of the loan's origination. Several FASB members, including Harold Schroeder, a veteran analyst of bank stocks, had described such “vintage disclosures” as a powerful tool for investors and also for bank managers.

Under the disclosure requirements that FASB decided on April 27, public business entities that aren't SEC filers would be able to “build up” more gradually to eventually assembling five years of loan-vintage information, which would be required on first use of the rules by larger banks.

At the 2021 effective date for the non-SEC filers, they would be required to disclose remaining loan amounts originated in 2021, 2020 and 2019, according to information provided to Bloomberg BNA by FASB's staff.

Bankers React

Independent Community Bankers of America reacted positively to the decisions by FASB on the vintage disclosures and on the deferral of the standard's effective dates.

Since late March, ICBA has staked out views markedly more friendly to FASB and its credit loss accounting prescriptions than it had voiced late last year and into February.

At American Bankers Association, Michael Gullette, an accounting specialist, told Bloomberg BNA in an email message that his group appreciates “FASB's acknowledgment that implementing” the current expected credit loss model “will be a challenge by extending the effective dates.”

“That was good,” Gullette added. “That said, FASB said community banks can use Excel spreadsheets. Maybe. The costs for most banks will be much greater than what they estimate.”

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

For More Information

A FASB meeting handout on the credit loss accounting issues weighed April 27 is available at http://www.fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176168100698.

FASB expects to post details of its decisions soon at http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1218220079432.

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