Ahead of Upcoming CECL Meeting the FASB Releases Memos to Shed Light on Implementation Questions
Ahead of a meeting by financial-institution representatives, auditors and others, the Financial Accounting Standards Board (FASB) have released five memos providing staff analyses of several issues raised about the nuances of implementing its Current Expected Credit Loss (CECL) model.
The Transition Resource Group for Credit Losses will meet June 12, 2017, to discuss several issues that the FASB said might arise as companies and organizations implement its year-old accounting standards update, ASU No. 2016-13 Financial Instruments – Credit Losses [Topic 326]. Banks that are SEC registrants must adopt the new standard in 2020 and other banks have until 2021, but in the meantime, the extensive change from current GAAP is leading to significant questions regarding implementation and impact on the allowance for loan and lease losses (ALLL). Registration to attend the TRG meeting in person is available here; the link for a live webcast is here.)
The memos released ahead of the gathering summarize staff views on a number of issues and in some cases, provide illustrative examples. The FASB said its staff will seek input from TRG members, indicating that some clarification of guidance could possibly result.
The memos, which are available on the FASB’s website, pertain to:
Determining the “estimated life” of a credit card receivable: FASB said stakeholders have noted that estimating the life for a credit card receivable balance is more difficult than it is for closed-end loans, so the board’s staff in the memo outlines acceptable methods for making the estimation. The issue of estimating the life of the receivable could have, FASB said, “a material effect on the measurement of the allowance for loan losses on credit card receivables.”
Accounting for Troubled Debt Restructurings (TDRs): Stakeholders have raised questions related to whether entities should forecast all types of reasonably expected future TDRs on a portfolio basis and include the effect of those reasonably expected TDRs in the calculation of expected credit losses.
Transitioning pools of purchased credit impaired (PCI) assets to purchased credit deteriorated (PCD): The primary issue related to this topic is whether entities can elect to maintain pools accounted for under Subtopic 310-30 only at the time of adoption, or whether they can elect to do so both at adoption and on an ongoing basis.
Determining when beneficial interests should be considered a PCD asset: The FASB said there are differing views on how to determine contractual cash flows as part of any analysis to assess whether the beneficial interest is required to apply PCD methodology under the guidance.
Discounting expected cash flows at the effective interest rate: The FASB said stakeholders have questions about whether the effective interest rate of a financial asset should be adjusted for prepayment estimates when the DCF method is being used to determine the ALLL.
“The FASB’s principle-based CECL guidance was clear in concept — report and reserve for life-of-instrument credit losses,” said Garver Moore with Abrigo’s Advisory Services. “But as we’ve worked with clients on the transition, it’s become clear, as with any comparable change, that there are a number of tactical and practical considerations.”
An excellent example, Moore said, is the requirement to use an effective interest rate (EIR) in the discount buildup for a cash-flow estimation. “For some portfolios, especially with significant premiums or discounts, this can be a material consideration vis a vis using the contract coupon rate, but the FASB staff is taking into account the practical reality of an institution’s ability to calculate and update this rate on a bottom-up basis. Clarifying the nuance and practical expectations on these points is a helpful outcome of the TRG’s work, and the memoranda produced are mercifully more specific and applicable than the relevant passages of the ASU.”
For additional help implementing CECL, take a look at the CECL Prep Kit.