It is safe to say the Financial Accounting Standards Board’s (FASB) issuance of Accounting Standard Update (ASU) 2016-13, Financial Instruments – Credit Losses in June of 2016 has been the source of much angst for financial institutions and their respective management teams, boards of directors, and other stakeholders. The shift from an incurred loss methodology to the current expected credit loss (CECL) model is profound and potentially unprecedented.

While the debate related to CECL has been rigorous and ongoing, financial institutions and their stakeholders need to remain focused on the task at hand.  Larger institutions that file with the Securities and Exchange Commission (SEC) must still comply in the first quarter of 2020 and the hope for some form of exemption from the Standard for others seems unlikely, despite the rhetoric.

With that being said and the January 1, 2023 proposed implementation date pending, it is probably an appropriate time to recount the relevant developments in and around the standard since June of 2016 and inventory the tools and resources available to financial institutions as they proceed along the CECL path.

  • FASB

Since issuing the Standard, the FASB continues to maintain a proactive dialogue on CECL via regular meetings and targeted roundtable discussions. They also work closely with financial institution regulators and the SEC to ensure a unified voice as it relates to implementation of the Standard.

The FASB also formed the Credit Losses Transition Resource Group to facilitate all things CECL from the FASB perspective. The group is made up of stakeholders from a variety of perspectives, including banks, credit unions, regulatory agencies, and those in public practice. The TRG’s meetings are conducted via webcast and archived for future reference.  The group has undertaken five open meetings, issued 18 memorandums, and published the Q&A referenced below. All recordings and associated materials are accessible via the FASB website.

Some of the dialogue mentioned above is captured and accessible to the general public.  Probably more notably and tangible, the FASB issued the following:

  • FASB in Focus as of June 16, 2016, summarizing the key provisions of the Standard.

  • Understanding Cost and Benefits regarding the Standard on June 16, 2016

  • ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses (November 2018)

  • FASB STAFF Q&A, Topic 326, No.1, Whether the Weighted Average Remaining Maturity Method is an Acceptable Method to Estimate Expected Credit Losses (January 2019)

  • ASU 2019 – 04 Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (numerous technical corrections) (April 2019)

  • ASU 2019 – 05, Targeted Transition Relief, Financial Instruments – Credit Losses (transition Fair Value Option) (May 2019)

  • FASB STAFF Q&A, Topic 326, No.2, Developing an Estimate of Credit Losses on Financial Assets

The FASB is also a proactive participant in CECL related webinars administered by the Federal Financial Institutions Examination Council (FFIEC) and has indicated additional CECL clarification and guidance will be forthcoming as needed.

  • FFIEC

Banking regulators have been particularly active relative to CECL since early 2018. Some of the communication and guidance comes from individual regulatory bodies like the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), but most have come via the joint regulatory body commonly known as the FFIEC.

While the FFIEC has yet to issue an Interagency Policy Statement (Policy Statement) on CECL, they have formally communicated expectations and guidance via a Joint Statement on the New Accounting Standard on Financial Instruments – Credit Losses on June 17, 2016, and Frequently Asked Questions on the New Accounting Standard on Financial Instruments – Credit Losses, most recently updated in April 2019.

The FAQ provides clear and specific answers to 46 commonly asked questions and serves as the primary formal document issued by the FFIEC to date. Banking regulators have indicated the FAQ will continue to be updated as needed and that an Interagency Policy Statement is forthcoming.  In the meantime and until CECL adoption, the regulatory expectation is that financial institutions will continue to adhere to the Policy Statements related to the Allowance for Loan and Lease Losses (ALLL) issued in 2001 and 2006, respectively.

The FFIEC has also communicated with stakeholders via a series of webinars. Each webinar has included representation for each of the joint regulatory bodies, as well as the FASB and SEC.

The first webinar of 2018, on February 27, was entitled Practical Methods Smaller, Less Complex Community Banks Can Use as a Starting Point for CECL. Loss rate methods covered included Snapshot/Open Pool, Remaining Life, and Vintage, and the FFIEC also provided practical insights on the importance of data, and controls.

The July 2018 FFIEC webinar, entitled Current Expected Credit Losses (CECL): Questions and Answers for Community Institution, discussed defining “small and less complex,” supervisory expectations, third-party vendors, data, reasonable and supportable, segmentation, and a variety of other relevant items.

The most recent webinar recorded in April 2019 centered around the Weighted Average Remaining Maturity Method (WARM) for determining credit losses under CECL. While the panel stopped short of endorsing the WARM method for smaller, less complex financial institutions, they made it clear it is a viable option. As noted previously, the FASB issued a Q&A on WARM in January of 2019, concluding that it is an acceptable method to employ to comply with the Standard. Interestingly, the American Bankers Association (ABA) issued a white paper regarding “implementation concerns” associated with the WARM method.

Due to the volume, nature, and extent of question received during the WARM webinar, the FFIEC  intends to develop a follow up WARM webinar in Q&A format.

  • American Institute of Certified Public Accountants (AICPA)

The AICPA’s Depository Institutions and Insurance Expert Panel has been working through 38 identified implementation issues on an ongoing basis and have issued three associated Issue Papers. Five of the remaining open items are expected to be addressed via Practice Aides and Accounting and Auditing guides. Seven others will be discussed via an Issue Paper currently in process.

The primary work product of the Depository and Lending Institution Expert Panel is the Accounting & Auditing Guide Depository and Lending Institutions: Banks and Savings Institutions, Credit Unions, Finance Companies, and Mortgage Companies. As such, significant revisions to the guide are anticipated to incorporate CECL appropriately.

The AICPA is also expected to issue a separate Accounting and Auditing Guide specific to credit losses, given the issue reaches beyond financial services companies.

  • ABA

The ABA has been proactively involved in the CECL discussion since the Exposure Draft phase.  The ABA has been critical of the Standard and the potential negative impact on the banking industry, particularly from a capital and earnings perspective. Nonetheless, the ABA has developed educational tools for bank boards and other stakeholders. Additionally, they developed two FAQ documents and published three white papers.  These Discussion Papers have covered WARM (as previously noted), reasonable and supportable forecasts, and disclosures and discussions of credit risk, respectively.

Last but not least, in May 2019, the Center for Audit Quality (CAQ) issued Preparing for the New Credit Losses Standard – A Tool for Audit Committees. While the CAQ’s work is most notably associated with SEC registrants, this document represents useful tools for executive management, boards of directors, and auditors of privately held institutions.

The balance of 2016 and 2017 and the lack of implementation guidance has significantly increased the level of anxiety for the financial institutions industry, particularly for smaller institutions. The flow of relevant information from regulatory bodies began in 2018 and was robust for the latter half of 2018 and has continued to date. In fact, the nature, volume, and extent of CECL related communication can be overwhelming.

CRI is ready to provide an overview of the CECL journey to date and able to identify the most timely and relevant information available for smaller, less complex institutions. Whether you are just getting started or well on your way, our CECL experts are here to assist you on the path to successful implementation.