Call Report – Off-Balance Sheet Exposures
2020 was a year of extraordinary upheavals and rapid changes. The new credit loss accounting standard, Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, became effective for certain public business entities. One of the new requirements in ASU 2016-13 is for financial institutions to calculate and report expected credit losses on off-balance sheet credit exposures, which include unfunded loan commitments, financial standby letters of credit, and financial guarantees not accounted for as insurance. There has been confusion on where to report these expected losses in the quarterly Call Report.
For entities that have adopted Topic 326, current Call Report instructions require all provisions for credit losses on off-balance sheet credit exposures to be reported in Schedule RI, item 7.d, “Other noninterest expense.” These instructions prohibit inclusion in Schedule RI, item 4, “Provision for loan and lease losses.”
A proposal was posted to the Federal Register in July that would update Call Report instructions for financial institutions that have adopted Topic 326, to report the provision for expected credit losses on off-balance sheet exposures in an institution’s total amount for credit losses in Schedule RI, item 4, beginning in March 2021. Since this change would obscure the expected credit loss breakout between on- and off-balance sheet exposures, the proposal would add a new memorandum item 7, “Provisions for credit losses on off-balance sheet credit exposures,” to Schedule RI-B, Part II, Changes in Allowance for Credit Losses.
The proposal would better align regulatory and financial reporting since Topic 326 requires an institution to “report in net income (as a credit loss expense) the amount necessary to adjust the liability for credit losses for management’s current estimate of expected credit losses on off-balance sheet credit exposures.”
In September 2020, the Call Report supplementary instructions noted that since the proposal was not finalized, institutions would be permitted to report provisions for credit losses on off-balance sheet credit exposures in either Schedule RI, item 4, “Provision for loan and lease losses,” or item 7.d, “Other noninterest expense.”
However, institutions should maintain the same reporting treatment in each subsequent quarter until the proposed reporting change is finalized. The revision has now been finalized and will be reflected in the Call Report instruction updates for March 2021.
If you have questions about these changes, contact your BKD Trusted Advisor™ today.