FASB’s Financial Instruments Credit Loss Standard FAQs
Author: Gordon Dobner
On December 19, 2016, the Federal Reserve, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and National Credit Union Administration agencies released a joint statement for FAQs on the Financial Accounting Standards Board’s June 16, 2016, Accounting Standards Update 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Among other things, the new standard creates the current expected credit loss (CECL) model for financial assets carried at amortized cost. These FAQs are a follow-up to the joint statement the agencies originally issued on the standard in June 2016. These FAQs were developed to assist institutions and examiners as they begin implementation. The agencies plan on publishing additional FAQs and/or periodically updating existing FAQs. The FAQs mostly expand on the original supervisory views of the agencies in their June 2016 joint statement.
- CECL introduces a single measurement objective to be applied to all financial assets carried at amortized cost. However, it doesn’t specify a certain model. Instead, it allows any reasonable approach as long as it achieves the new standard’s objective.
- Although the agencies expect the new standard to be scalable to all institutions, inputs to allowance estimation methods currently used will need to change to properly implement CECL requirements.
- Similar to today’s incurred loss model, institutions can continue to leverage credit risk management practices in their qualitative and quantitative factors.
- Institutions may apply different estimation models to different groups of financial assets or loan pools.
- Institutions will be required to incorporate forward-looking information and estimate effects of forecasted future events for periods that are reasonable and supportable.
- The agencies expect that smaller and less complex institutions will be able to adjust their existing allowance methods to meet the requirements of the new standard without the use of costly and/or complex modeling techniques.
- The agencies expect supervised institutions to make good faith efforts to implement the new standard in a sound and reasonable manner.
- After CECL’s effective date, the agencies will assess the new standard’s implementation and consider issuing additional supervisory guidance to aid in developing practices for the sound application of the new standard.
- Although the new standard provides examples of similar risk characteristics, smaller and less complex institutions may conclude their segmentation practices with the incurred loss methodology also are appropriate with the methodology, or they may refine those practices.
- CECL will apply to held-to maturity (HTM) debt securities, and in contrast to today’s accounting, institutions will generally need to establish an allowance for credit losses on their HTM debt securities at the date they adopt CECL.
- Agencies won’t require institutions to engage third-party vendors to assist in implementing and calculating allowances within CECL.
- Institutions may need to capture additional data and retain data longer to meet CECL data requirements. It’s recommended institutions discuss the availability of historical loss data internally and with their core system service providers.
- The agencies won’t establish allowance level benchmarks or floors with CECL.
Both the original joint statement and FAQs encourage transition planning and implementation preparation for the new standard and a discussion of possible methods. For more comprehensive information on implementation considerations, read “Potential Data Needs & Considerations with CECL.” In addition, read “A Comprehensive Look at the CECL Model” and the archived webinar “CECL – Breaking Down the Final Standard” for more information.
Contact your BKD advisor if you have questions.