Industry Insights

Credit Impairment Standard Nears Issuance

April 2016
Author:  Anne Coughlan

Anne Coughlan



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On April 1, the Financial Accounting Standards Board (FASB) hosted the first public transition resource group (TRG) meeting for the forthcoming final credit impairment standard, known as the CECL model. TRG’s 16 members include financial statement users, auditors and preparers (including representatives from two community banks and a credit union). Banking regulators in attendance included the Securities and Exchange Commission, Federal Reserve, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and National Credit Union Administration. TRG will make recommendations to help FASB determine what, if any, action is appropriate and provide stakeholders with a forum to learn about the new standard from others involved with implementation.

Unlike the transition group for the revenue recognition standard, the CECL TRG convened before the final standard’s release; the group has held several private meetings to evaluate drafting changes to the final guidance. By holding these meetings earlier in the process, FASB hopes to avoid issuing amendments to the CECL guidance before its implementation dates, as was the case with the revenue recognition project.

To address requests for re-exposure, FASB unexpectedly released the current working draft of the new guidance. Attendees agreed the draft was a vast improvement from earlier versions and that it was both operational and scalable for smaller banks. The draft included additional examples addressing specific community banking concerns. The Independent Community Bankers Association (ICBA) had vocally opposed the proposed changes; however, following this meeting, ICBA’s Vice Chairman Tim Zimmerman noted that FASB has “clearly listened to the concerns of ICBA and community bankers.”

Bankers have been concerned about the validity and documentation related to long-range forecasts, especially having to apply national or global data to smaller, more diverse lending portfolios.  Although FASB has previously communicated that reversion to historical average was appropriate for periods beyond a bank’s ability to forecast using reasonable cost and effort, the language in the released draft unambiguously confirmed FASB’s intent to community bankers.

Consistent with FASB’s prior comments, the April 1 draft clearly states that banks can determine the allowance for credit losses using various methods and continue to evaluate expected credit losses on an individual basis. The FDIC’s chief accountant noted, “The refined wording of the planned standard makes it clear that multiple approaches to assessing expected credit losses are acceptable.” Other regulators present noted that they found the language to be flexible and operational for smaller banks.

While complex models may not be required under the new standard, banks may need to capture and save additional loan-level data, e.g., risk rating by individual loan, loan duration, individual loan balance, individual loan charge-offs and recoveries (partial and full), etc. Once the final standard is issued, banks should meet with their data service providers to evaluate access to historical records and future data requirements.

The table below highlights the current expected effective dates of the new standard. In late April, FASB will reconsider the effective dates due to repeated delays in issuing the final standard. All dates are tentative until the final standard is issued.

FASB agreed to additional minor changes as a result of the recent TRG meeting. Given attendees’ positive feedback, FASB’s plan to issue the final standard on or before June 30, 2016, seems highly likely.

BKD will continue to monitor this project. Visit our Hot Topics page to learn more.

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