The Financial Accounting Standards Board finalized new rules regarding credit losses, fundamentally changing how credit unions, banks and other financial institutions calculate their loan loss reserves.
In a release issued Thursday, FASB said the Current Expected Credit Loss rules, formally titled Accounting Standards Update No. 2016-13, require credit unions and other organizations to measure expected credit losses using historical experience, current conditions, and reasonable and supportable forecasts.
The rules also require more disclosures regarding credit quality and underwriting standards, as well as significant estimates and judgments used in estimating credit losses. Some of those requirements will be optional for credit unions and other non-public business entities.
“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 Chair Russell Golden said.
According to FASB, many loss estimation techniques in use today are still allowed, but the inputs will have to change to reflect the full amount of expected credit losses. Judgment will still be a big factor in determining which loss estimation method is appropriate, it noted.
In the works since 2012, CECL has been controversial in the credit union industry. Both NAFCU and CUNA said they are unhappy with various aspects of the final rule.
“We are disappointed the board did not heed our call to issue an updated draft for public comment before finalizing this standard,” NAFCU President/CEO Dan Berger said. “Credit unions still have reservations with the standard due to its impact on their operations and their ability to serve members.”
CUNA Deputy Chief Advocacy Officer Elizabeth Eurgubian added, “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. 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.”
For credit unions, the rules take effect for fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021. For public companies that file with the Securities and Exchange Commission, the rules will be effective for fiscal years beginning after Dec. 15, 2019. All entities can adopt the rules for fiscal years beginning after Dec. 15, 2018.
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