The Financial Accounting Resource Center™ is a comprehensive research service that provides the full text of standards, the latest news from the Accounting Policy & Practice Report ®,...
July 22 — Financial institutions will have flexibility in how they factor in forecasted economic conditions in setting up loan loss reserves under new accounting rules on credit losses, members of the Financial Accounting Standards Board said.
Such messages, by board members Marc Siegel and Harold Schroeder in a July 21 FASB webcast on the month-old standard, likely will further reassure bankers—especially community bankers—that the board isn't looking for overly complex accounting to carry out the rules that go into effect in 2020 and 2021.
The comments by Siegel and Schroeder build on earlier remarks at an April meeting of the new advisory group on the standard—Accounting Standards Update 2016-13; ASC 326.
At that meeting of the Transition Resource Group for Credit Losses, FASB members and federal banking regulators suggested that accounting for expected loan losses prescribed by the new rules should be “scalable” to the size of the reporting institution or company.
It shouldn't necessarily require complicated computer-driven gymnastics (12 APPR 07, 4/8/16).
Siegel detailed how FASB purposely didn't prescribe a particular or minimum time period “for what's a reasonable and supportable forecast” used to come up with an estimate of expected loan and other credit losses.
“We gave that kind of flexibility on purpose,” Siegel said. “During different economic times and different parts of the economic cycle, it could be that reasonable and supportable time periods change.”
Siegel and Schroeder also said that banks would be able to revert to historical loan loss information when more specific, observed information isn't available. Supportable judgments will have to be made, however.
The viability of the newly prescribed accounting, aimed a preventing the “too little, too late” reporting of loan losses, also has been noted in the investing marketplace. In a July 20 report, Fitch Ratings, Inc. said that the new credit loss reporting rules will be “manageable for U.S. banks” as they will have “adequate time to prepare for implementation.”
Fitch also outlined some likely impacts.
“Expected loss estimates will be more sensitive to management's judgments” under FASB's new “current expected credit loss” model of accounting,” according to the ratings agency. Fitch reasoned that the new blueprint “covers a longer time horizon and sudden changes in economic conditions will create earnings volatility.”
The new FASB standard, issued June 16, “could incentivize banks to originate loans earlier in a reporting period,” according to Fitch. The agency's analysts explained that full provisions, or reserving for loss contingencies, are taken upon origination of the loan “while interest is recognized in earnings over the life of the loan,” Fitch analysts concluded.
Banks may be less inclined to offer noncancellable loan commitments or raise costs of commitments as loan loss reserves have to be recorded up front under the FASB standard, the ratings agency said.
To contact the reporter on this story: Steve Burkholder in Norwalk, Conn., at email@example.com
To contact the editor responsible for this story: Steven Marcy at firstname.lastname@example.org
Further information on new credit loss accounting standard, including podcast video on the rules, is available at FASB's homepage, at http://www.fasb.org.
Copyright © 2016 Tax Management Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)