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Banks will have flexibility in how they calculate loan and other credit losses under new accounting rules spurred by the financial crisis of 2008-2009, Harold Schroeder, a member of the Financial Accounting Standards Board, told Bloomberg BNA.
“It really leaves open what banks can do,” Schroeder, a former banking analyst, said in a video interview July 17 on the FASB standard—ASU 2016-13; ASC 326.
Watch Schroeder’s interview here: https://www.bna.com/fasbs-accounting-credit-m73014463443/
The 2016 FASB standard on accounting for credit losses could have substantial impacts on bank earnings. The rules require earlier, up-front booking of expected credit losses.
“We’re not dictating and we’re not setting the specific requirements in terms of how they calculate” expected credit losses and reserves set up to absorb those potential setbacks, he said of banks.
Loss models can be “scalable” and not overly complex, hinging on the size of a bank or credit union, rulemakers and bank regulators have said.
Bigger banks will have to apply the new rules Jan. 1, 2020. Early adoption is allowed for reporting on periods starting after Dec. 15, 2018.
Schroeder set out the principle under-girding the new accounting rules, which herald the biggest change in banks’ accounting in decades: “What do you have on the books today? What do you think you’re going to collect relative to what you have booked? And then record as a reserve the difference.”
He said that amounts to “an A minus B equals C type of equation.”
“Most banks already know what they have recorded,” Schroeder said. “The real question is what do they expect to collect.”
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