What are financial institutions saying about FASB’s CECL model?
**The FASB issued the final CECL standard on June 16, 2016. For up-to-date information and resources, access the updated CECL Prep Kit.
FASB recently extended to May 31 the comment period on its proposed new model (commonly known as the CECL model) for accounting for credit losses, but some financial industry players are seeking an even longer extension.
FASB’s website shows the board has received 29 comment letters so far, and those not asking for a deadline extension are generally opposed to the new model.
Shifting to the expected loss model from the incurred model will not only cause a significant increase in the allowance for credit loss, it will also cause a loss of capital in financial institutions making funding adjustments to the credit loss account based on losses that may not occur, one commenter noted. Having to assume losses at origination will lead lenders to tighten credit, curtailing lending, this credit union also said.
A recent survey by SNL Financial found more than half of respondents expect the proposal would increase reserves by between 10 and 50 percent. The final amount by which the CECL model could affect allowance levels will be determined by an institution’s portfolio composition, portfolio vintage, current ALLL methodology, forecasts of future events, etc.
Another institution providing comments to FASB said the proposal creates additional complications and inconsistencies with basic accounting principles and could make financial statements less useful.
Fannie Mae and Freddie Mac have urged FASB to extend the comment period to July 5, which is the deadline for comments on the International Accounting Standard Board’s July 5 exposure draft related to expected credit losses.
The CFA Institute asked both FASB and the IASB to work together to develop some examples of how their differing methods would apply to the same underlying scenario. This would better highlight the specific differences and allow for more informed feedback, the group wrote.
FASB’s Dec. 20 Proposed Accounting Standards Update calls for an entity to recognize an allowance for credit losses based on supportable forecasts of contractual cash flows not expected to be collected.
Under the “incurred loss” model presently employed, a loss is not recorded until it is probable that a loss event has occurred. This model has been criticized for a number of reasons but primarily since the loss is recorded too late in the credit cycle.
FASB’s proposed model eliminates any threshold required to record a credit loss and allows entities to consider a broader information set when establishing their allowance for loan losses. In addition, the model aims to simplify current practice by replacing today’s multiple impairment models with one model that applies to all debt instruments.
If you are interested in commenting on the proposal, it is important to review how to draft a comment letter and submit it prior to the May 31 deadline.
For more information on FASB’s CECL Model and the impact it could have on financial institutions, download the whitepaper, FASB’s New CECL Model: How it impacts your ALLL.
For updated regulatory guidance, questions, discussions or latest news on the allowance for loan and lease losses, join the LinkedIn group: ALLL Forum for Bankers.