CW Associates CPA's Hawaii: 5 tips for implementing FASB’s credit loss standard

Revenue recognition and lease accounting standards have had a big impact on financial institutions. But new standards on reporting expected credit losses may be even more significant for banks.

“This is much more related to a bank’s core business,” said Reza Van Roosmalen, a KPMG LLP managing director. “It’s the biggest accounting change I think that banks have been subject to in a long time.”

FASB’s expected credit loss standard, which was issued in June, changes the reporting requirements from an incurred-loss to an expected-loss approach and addresses concerns about financial instruments accounting resulting from the financial crisis that began in 2007.

The International Accounting Standards Board also moved from incurred-loss to expected-loss accounting with the issuance of IFRS 9, Financial Instruments, in 2014, although its impairment model differs from FASB’s current expected credit loss (CECL) approach.

The FASB standard was intended to align accounting with the economics of lending by requiring the immediate recording of the full amount of credit losses that are expected. As a result, experts say the credit risk group and the accounting group will need to work closely together to comply with the standard.

“There’s going to be a need for education from accounting to the rest of the business partners,” said Jonathan Prejean, a Deloitte & Touche LLP managing director. “Obviously, the credit risk function is going to be involved, and your forecasting and your planning, and even the lines of business and how they write their business.”

5 considerations

Here are five things experts say preparers may want to consider as they begin to implement FASB’s expected credit loss standard:

The standard is not just for banks. Financial institutions and their accounting for their loan portfolios will be affected the most by the standard. But it also applies to other organizations.

Lease receivables, trade receivables, and held-to-maturity debt securities are among the other assets organizations may hold that are within the scope of the standard.

“This is not just a banking standard, and it’s not just loans,” said Jonathan Howard, a partner in the Deloitte & Touche LLP national office. “It applies to all entities that have assets that represent the right to receive cash that they carry at amortized cost.”

Find the data gaps. Because the implementation date is a few years away for the FASB standard (2020 for public companies), Prejean said, companies have time to collect the data they need—if they don’t already have it.

The issuance of the standard gives them the ability to move forward with an implementation plan, and a big part of that plan will be finding gaps where they don’t have data they will need to perform the accounting required by the standard.

“They can start pulling that data and making sure they have it, and make sure they’re collecting it if they have the ability to collect it,” Prejean said. “If they don’t, make sure they can find a way to get it, and then make sure that it’s appropriate for financial reporting.”

This includes making sure the appropriate controls are in place around the data.

Use previous work. Banks may be able to take advantage of their work from previous compliance exercises as they implement FASB’s credit loss standard.

“It’s important for banks to think about how they could approach the standard in the most efficient and scalable way, and look for similarities and synergies and maybe even corroborate some of the data and modeling as far as they can with existing models,” Van Roosmalen said.

Multinational organizations that have been implementing IFRS 9 may use that work to their advantage as they implement the FASB standard. Banks that have undergone stress-testing exercises may be able to expand the scope of that work to assist with the accounting implementation.

Remember disclosures. Figuring out how to collaborate with the credit risk function, evaluate your existing credit risk model, and select the appropriate risk model for your loan portfolio will be a big part of implementation.

While focusing on those issues is important, preparers shouldn’t lose sight of the enhanced disclosures and the data that will be needed to fulfill the disclosure requirements.

Don’t delay. Gathering data may be a challenge, but Howard said getting a quick start and figuring out what data are needed will help organizations make a smooth transition.

“I’m not saying everybody needs to go do a dry run today,” he said. “But you’ve got time. So I think people need to start thinking about how they are going to apply the standard so they can set up the processes to go about collecting that data, capturing that data, so that might ease your transition.”