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FASB to consider delaying CECL deadlines for smaller firms

NORWALK, Conn. — The Financial Accounting Standards Board is considering whether to consolidate or delay the deadlines for smaller firms to comply with a contentious new credit loss accounting standard, according to the association's chairman.

In an interview with American Banker, FASB Chairman Russ Golden revealed he would convene a meeting July 17 to discuss whether to reduce the number of effective dates for the current expected credit loss accounting rule, known as CECL, and other accounting rule changes from three to two, and whether that consolidated compliance date should be pushed back to 2023.

“CECL has three effective dates: public [companies] are Jan. 1, 2020; private companies without restrictions on their shares are Jan. 1, 2021, and all others are Jan. 1, 2022,” Golden said. “That does cause some confusion. And one of the things we'll be looking at is, is it easier for this system just to [not only] have a staggered effective date, but two effective dates?”

Golden said the board is considering the changes in light of concerns from smaller firms that they may not be ready to meet the deadline and could benefit from learning how the biggest firms comply with the new standards starting in January 2020.

“The pushback for smaller institutions is similar to some of the pushback that we received prior to me becoming chair, and it has to do with the concerns that small business have on availability of resources — the costs associated with … training their employees, training their users,” Golden said. “And that is why we have begun to implement staggered effective dates for small institutions, private companies. CECL gives a two-year deferral for small private companies, and what we have learned from the implementation of other projects is perhaps a longer time between the date in which private companies are required to go effective than public [firms] could help mitigate some of their cost and concerns.”

The FASB board is made up of seven independent members who will consider the delay. While Golden did not indicate whether a majority of the members favor a delay, he did say that the board continues to believe that the costs associated with CECL are outweighed by the various benefits to firms, the public and the financial system.

“The benefits are more timely reporting of credit losses, measurement using forward-looking information, greater transparency in the extent of expected credit losses, changes in expected credit losses, greater transparency on credit quality indicators and portfolio composition, and a decrease in cost for users because credit losses will now be reported based on expectations and forward looking information,” Golden said.

“That comes with a cost," he said. "You have to gather data, you have to incorporate new inputs new processes, to review and audit the new information, you'll have personnel costs to provide education and training, and you'll have to educate investors about the change. We're starting to see that now with public companies. At that time and still today the board believes the benefits justify the cost.”

CECL would revise the way that the U.S. generally accepted accounting principles — which govern how accountants manage the finances for all publicly traded companies and many private companies — treat credit losses. Historically, GAAP has required firms to hold reserves for credit losses only if they have a reason to expect a heightened risk of default, such as a missed payment. Under CECL, banks and other companies would have to quantify the potential loss risks prospectively on all their loans regardless of their performance.

FASB began considering revising its approach to credit losses in the wake of the financial crisis, where firms’ failure to anticipate credit losses in mortgage default rates left banks and other firms flat-footed when mortgages went into foreclosure and mortgage-backed securities stopped performing. The board adopted CECL in 2016 after considering a range of options for addressing that shortcoming.

But pushback against the rule has intensified in recent months. Banks have begun to hint at the potential impact of the rule on their capital, loan-loss reserves and earnings in their quarterly Securities and Exchange Commission filings.

And many members on Congress — Democrats and Republicans — are concerned that the change would be particularly harmful for smaller banks and financial institutions. Members of both parties of the House recently introduced legislation — similar to a bill offered by Republicans in the Senate — that would delay implementation of CECL until federal regulators had conducted a quantitative study of the rule’s impacts.

At least one lawmaker said Thursday that a delay for just the smallest firms doesn't go far enough.

“That's not good enough, especially if they're going to continue with the bigger banks,” said Rep. Blaine Leutkemeyer, R-Mo., a vocal critic of CECL in Congress. “This standard is going to be harmful to financial institutions, their customers and the economy at large because of the way it's constructed and the effects it could have.”

Leutkemeyer added that he expects the standards board to receive ever-incrasing scrutiny over its CECL proposal n the coming months.

“As more people become aware of the guidelines and how they'll be implemented, they're seeing it's a really bad deal,” he said. “FASB is continuing to ignore those voices.”

Many firms — especially those publicly traded firms whose deadline will remain Jan. 1, 2020 — say the only way that their compliance deadline changes is if Congress acts. William E. Matthews V, the CFO of the $16 billion-asset CenterState Bank Corp. in Winter Haven, Fla., said his team isn't taking any notice of the talk about delay.

“We're proceeding as if things are set in stone,” Matthews said.

Mike Gullette, senior vice president of tax and accounting for the American Bankers Association, said that a "partial delay does not address the concerns raised by a growing list of lawmakers from both parties that would be analyzed through a comprehensive Quantitative Impact Study."

"A QIS would allow everyone to see the true economic impact this significant change will have and CECL should not move forward until such a study can be completed," he said.

Carrie Hunt, executive vice president of government affairs and general counsel for the National Association of Federally-Insured Credit Unions, agreed the prospect for a delay doesn’t go far enough and doesn’t necessarily reflect the challenges that credit unions face in CECL implementation.

“FASB’s project to investigate how it assigns effective dates for accounting standards is a positive development that could potentially lead to smoother transitions, but this inquiry should not distract from what is urgently needed; namely, practical relief from CECL,” Hunt said. “The credit union industry’s unique structure deserves separate and additional attention in the context of CECL implementation, and NAFCU will continue to engage with FASB and regulators to reduce burdens.”

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