The Basel Committee on Banking Supervision is in the process of issuing new guidance regarding credit losses that could negatively impact U.S. credit unions, according to the World Council of Credit Unions.
The Madison, Wis.-based international trade group is pressing for clarification and adjustment in several areas so that the Basel Committee's guidance, when issued, doesn't trigger similar rules proposed by the Financial Accounting Standards Board (FASB) that could change the way U.S. financial institutions account for credit losses, according to World Council Vice President and General Counsel Michael Edwards.
Edwards' April 30 letter commenting on the Basel Committee's February consultative document, "Guidance on accounting for expected credit losses,"praises the document's recognition of proportionality when administering the guidance among financial institutions of various sizes and complexity.
But World Council's letter strongly opposed the committee's suggested substitution of more stringent pro forma regulatory accounting principles (RAPs) in place of generally accepted accounting principles, better known as GAAP. The letter also challenged the use of "practical expedients" to extend rules that apply to lending activities practiced by internationally active banks to less sophisticated credit unions, which rarely conduct international business.
"The Basel proposal is relevant to U.S. financial institutions because it would require banks and credit unions to adopt an 'expected credit loss' approach to establishing reserves for credit losses," Edwards said during a subsequent interview. "The 'expected credit losses' approach under U.S. GAAP is FASB's proposed 'current expected credit losses (CECL),' which CUNA and other U.S. credit union organizations have opposed."
Both FASB and the International Accounting Standards Board had been developing new models to account for loan losses in light of problems caused during the recent recession. On Dec. 20, 2012, FASB issued for public comment a proposal that would change the way financial institutions accounted for expected loan loss.
FASB's proposed model for CECL utilized a single 'expected credit loss' measurement objective to recognize losses, replacing the multiple existing impairment models in U.S. GAAP, which generally require that a loss be incurred before it is recognized. Under the proposal, management is required to estimate the cash flows it does not expect to collect, using all available information, including historical experience and reasonable and supportable forecasts about the future.
The balance sheet would reflect the current estimate of expected credit losses at the reporting date – the allowance for credit losses – and the income statement would reflect the effects of credit deterioration (or improvement) that has taken place during the period as a provision for bad debt expense.
The Basel Committee's current guidance, if finalized as proposed, could hasten the adoption of FASB's CECL guidelines, Edwards said. U.S. credit unions and their trade groups see inherent problems with the FASB proposal as it is currently written.
"Specifically, the Basel Committee proposal we commented on says that financial institutions should follow an expected credit loss model for provisioning the allowance for loan losses, rather than an 'incurred loss' approach that is the current rule in the U.S. and elsewhere," Edwards said. "The guidance does not say that an institution should adopt any particular set of expected credit loss rules, but CECL is the only expected credit loss approach proposed under U.S. GAAP, and the Federal Credit Union Act requires U.S. federally-insured credit unions to follow U.S. GAAP if they have more than $10 million in assets."
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