Good News for Small Banks and Credit Unions: FASB Votes to Delay Their Effective Date for New Credit Loss Standard

Many small banks, credit unions and lenders have been hoping the Financial Accounting Standard Board (FASB) would give them more time to comply with the new current expected credit losses (CECL) accounting standard, or exempt them altogether. They got good news on October 24, 2018, when FASB agreed to clarify that the effective date for nonpublic entities will be fiscal years beginning after December 15, 2021 — which means 2022 for these entities. The FASB board said that had been its intention all along, making this more a clarification than an amendment. The clarification still requires a formal written vote, but it should be finalized and published before the end of 2018.

At the same meeting, FASB refused to consider exempting community banks and credit unions from the standard entirely.

Even with the later effective date, continuing to put off CECL preparation is a bad idea. Because the new standard conceives of credit losses differently, your organization will need time to think through its types of loans and how they are affected by economic factors. What kind of approach to the new model will work best for your business? You will likely need to gather more loan data than you have historically and to consider more outside influences. Management will also need to document and justify its projections.

The new CECL standard is not prescriptive — it specifies the goal, not the means.  It is also intended to be scalable, which should make it flexible enough to accommodate financial institutions’ different sizes and complexities. Take advantage of this flexibility by considering the kind of loss model you are using now. It may be something that, with small adjustments, could meet the requirements of the new standard. Begin by looking at your loan types or classifications; are they too aggregated? If so, how do you need to revise the classifications?

Then begin gathering loan data based on those categories, beginning with the loss history for each one. Consider the macroeconomic trend that will affect your losses: unemployment rates? Property values? Interest rates? Currency fluctuations? The “Q factors” that adjust your expected losses for economic trends must be adjusted for your individual portfolio. Ultimately, the question you must answer is, “What drives my business’s losses, and how can I make reasonable predictions?”

Many institutions have worried about the impact of the new standard on reserve requirements. Right now, reserves may be high due to low charge-off rates, so CECL may not have as large an effect on reserves as some have feared.

The CECL standard is very flexible, as long as you can document and provide evidence for management assumptions and projections. There is also help available, with numerous software-based models you could purchase or design in-house. You can also seek help from accounting professionals experienced in bank compliance.

Weaver’s Financial Institutions Services group assists banks and nonbank lenders across the U.S. with regulatory compliance issues (including FDICIA, FFIEC, GLBA, BSA/AML and ALLL), risk management, internal audit and IT security and compliance. The firm also performs financial statement audits and tax planning and compliance services. We would be happy to answer your questions on CECL and help you get your organization prepared to meet the new standard without a last-minute scramble. For more information, review our financial institutions page or contact us.