Bankers are expecting a new accounting rule on how to reflect credit losses in financial statements to produce big accounting process changes -- some saying the biggest changes ever.
At a recent conference of the American Bankers Association, 63 percent of more than 100 banking executives who participated in an on-site poll said they expect “substantial changes” to policies, procedures or technology to comply with Accounting Standards Update No. 2016-13. That’s the financial-crisis-inspired standard adopted by the Financial Accounting Standards Board that require companies to measure loan losses or other credit-related losses according to a “current expected credit loss” model.
CECL requires financial institutions and others that might have debt-based assets in their financial portfolios to book losses based not just on actual performance of the debt instruments, but on projections about how they might perform in the future. The controversial approach, especially with smaller banks, requires entities to estimate losses that might occur and book those from the inception of the instrument, even if the counter-party to the debt is paying faithfully.
In addition to the majority of bankers who expected substantial change to comply with the new standard, an additional 20 percent said they viewed the new requirements as the biggest change in bank accounting that they’ve ever witnessed. Nearly half of bankers said they had already begun to prepare for implementing the new CECL model, and one-fourth said they would be on it by the end of the year. Less than 10 percent said they hadn’t even begun to think about how to adopt the new standard yet.
The biggest obstacle to adopting the new accounting is managing the overwhelming amount of data that will be necessary to perform the new accounting, in the view of nearly half of the bankers in the survey. Because the new model is based on expected losses, entities will need to perform some estimates using historic evidence where they have it along with projections or assumptions.
Beyond data gathering, another 27 percent said they expect the most daunting part of the effort to come in answering questions from auditors, regulators, and investors. An additional 10 percent are most concerned about their current outdated technology, and 9 percent are most bothered by the need for more personnel to get the job done.
The new standard takes effect for fiscal years beginning after Dec. 15, 2019, well after capital markets have adopted other major new rules around revenue recognition, leasing, and classifying and measuring financial instruments.