WASHINGTON—Financial statement preparers will be required to report credit losses on loans and other financial instruments in a more timely fashion under a new standard issued Thursday by FASB.
Financial institutions and other organizations will be required to measure all expected credit losses for financial assets held at the reporting date in accordance with Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the Journal of Accountancy reported.
The expected losses will be based on historical experience, current conditions, and reasonable and supportable forecasts. The move from an incurred-loss approach to an expected-loss approach is designed to provide investors with more forward-looking information, the Journal said.
Many of the loss estimation techniques applied today will still be permitted under the new rule, according to FASB.
“The new guidance aligns the accounting with the economics of lending by requiring banks and other lending institutions to immediately record the full amount of credit losses that are expected in their loan portfolios, providing investors with better information about those losses on a more timely basis,” FASB Chairman Russell Golden said in a news release.
CUNA and NAFCU commented on the changes.
“Based on our initial look at the final standard, it appears that the hard work of CUNA and our member credit unions helped bring about the final version of the standard that will make compliance much more manageable to credit unions,” said CUNA deputy chief advocacy officer Elizabeth Eurgubian. “While we continue to disagree with FASB’s decision to apply the new standard to credit unions, we recognize that the final standard reflects input provided to the FASB board and staff by CUNA and the credit union industry.”
NAFCU President and CEO Dan Berger said the trade association is "disappointed the board did not heed our call to issue an updated draft for public comment before finalizing this standard. Credit unions still have reservations with the standard due to its impact on their operations and their ability to serve members.”
In April, the FASB board also voted to make certain disclosure requirements in the CECL standard optional for “non-public business entities,” which include credit unions, NAFCU said.
In February, Berger urged the FASB board to issue an updated credit losses exposure draft and solicit additional public comments before finalizing the accounting standard. NAFCU also said that credit unions, as member-owned, not-for-profit cooperatives, should be entirely exempt from the credit losses project.
NAFCU said it is reviewing the final standard for its full impact on credit unions.
The standard will become effective in 2020 for financial institutions required to file financial statements with the U.S. Securities and Exchange Commission or the appropriate federal banking agency under the federal securities laws. The new accounting standard will take effect in 2021 for all other financial institutions. Early adoption is permitted, but no earlier than in 2019.
In a joint statement from the NCUA, OCC, FDIC and Federal Reserve, the agencies encouraged financial institutions to "begin planning implementation of the new standard and ensure that appropriate institution staff works closely with their senior executives and boards of directors during this transition. Institutions are encouraged to plan for the potential impact of the new standard on capital in advance of the new standard’s effective date."