In the midst of sudden changes in global health and economic conditions, accounting standards are making headlines. Within the past week, there have been two very different stances taken relating to accounting for current expected credit losses (CECL) under ASU 2016-13 and for troubled debt restructurings under U.S. GAAP.
On March 19, Chairman of the Federal Deposit Insurance Corporation Jelena McWilliams sent a letter to the Financial Accounting Standards Board (FASB) urging it to take actions to delay financial institutions’ transition to the new CECL model. This included giving financial institutions subject to ASU 2016-13 the option to postpone implementation and delaying the effective date for financial institutions not yet required to implement CECL. She is also seeking loan modifications resulting from the coronavirus pandemic to be excluded as concessions in determining whether there has been a troubled debt restructuring (TDR).
The reason for these appeals, McWilliams argued, is sudden economic changes and the uncertainty of future forecasts may result in banks facing higher-than-anticipated increases in their credit loss allowances and may make factors required to assess allowance requirements under the new model less reliable. In addition, for smaller institutions, the transition to CECL will require significant financial and staffing resources. Financial institutions are focusing on immediate and unprecedented challenges relating to the impacts of the pandemic and its effect on the financial system, their employees, and customers, and McWilliams encouraged FASB to support industry efforts by agreeing to these changes.
Chair of the Board of Trustees of the Financial Accounting Foundation Kathleen Casey, however, shared a very different view about proposed changes to these same accounting standards. She sent a strong letter to Congress on March 23 urging the removal of draft measures included in the Senate’s economic recovery package relating to changes in accounting for CECL and TDR. Such measures include temporary relief from compliance with ASU 2016-13, which took effect for public banks on Jan. 1, 2020, and suspension of GAAP TDR guidance relating to loan modifications.
Casey cautioned Congress against rashly adopting unprecedented changes that would diminish confidence in GAAP and financial reporting. “The inclusion of these provisions in the bill blurs the important distinction between accounting standards and matters of either public policy or regulation. Moreover, it fundamentally undermines the longstanding and time-tested approach in the U.S. to transparent, rigorous and independent accounting standard-setting, which market participants rely upon and that plays a critical role in supporting our capital markets and broader economy,” she wrote.
Casey reminded Congress that the nation’s largest banks have already invested in changes to their business processes and systems to implement CECL and have communicated CECL’s expected financial impacts to investors. Thus, negative impacts of the accounting change on regulatory capital could be addressed by the banking regulators already working on such concerns. New reporting requirements of CECL would provide more information to investors about banks’ loan portfolio risks and overall financial condition, which would be helpful to investors and capital markets during this crisis.
FASB, in response to stakeholder concerns, supported guidance for TDRs issued March 22 by federal and state prudential banking regulators clarifying the TDR guidance as it relates to modifications of loans in response to COVID-19. As a result, the draft provision in the bill is no longer needed.
As unprecedented changes in the health of our country and our economy continue to unfold, it appears accountants need to keep a sharp lookout for changes to accounting standards that result.