Accounting activity at publicly held financial institutions apparently is picking up in the new year to prepare for new requirements for the recognition of loan losses.
While the U.S. rules don’t take effect for a few year more, the implementation of similar international rules has acted as a wake-up call among U.S.-based entities in the financial services sector, says James Gellert, CEO of ratings firm RapidRatings. “We’re seeing a tremendous amount of activity in banks, from the largest to the smallest ones, that we weren’t seeing three or four months ago,” he says.
Under U.S. GAAP, all public companies will be required beginning in 2020 to reflect losses on debt-related instruments using a more forward-looking approach than under current rules. The Financial Accounting Standards Board developed its “current expected credit loss” model to answer criticisms that emerged following the financial crisis that accounting rules generally prevented entities from showing signs of stress in their portfolios until loss was virtually inevitable, too late for investors to respond.
Similar requirements took effect under International Financial Reporting Standards with the start of the 2018 reporting year, although the approach under IFRS 9 is not converged with the CECL model under GAAP. FASB and the International Accounting Standards Board attempted to develop a similar model for both rule books but parted ways under their respective constituent demands for differences.
“IFRS 9 is focusing more people’s attention on our version,” says Gellert. Smaller institutions in particular are perhaps furthest behind in getting prepared for the new GAAP rules, he says, some of them “underestimating the problem.”
Under an ideal transition method, companies would have their new accounting processes developed in time to begin dual reporting so they will have the historic information they’ll need to present in financial statements when the standard takes effect. “Formal reporting is less than two years away,” says Gellert.
The implementation of the international standard for companies that report under IFRS has led U.S. entities to some acceptance that the GAAP standard will take effect as scheduled, says Gellert. “A lot of institutions were lobbying and hoping to make CECL go away,” he says. “Now it looks like that’s not going to happen. IFRS 9 is a wakeup call for firms that hoped this would somehow get kicked down the road or overturned. That doesn’t appear likely.”
While financial institutions may be getting more active in preparing, Gellert says he still sees little activity among other corporate entities that will be affected, which includes any kind of entity that holds credit-related instruments. “Any company that gives credit, captive finance groups, leasing businesses, long-term subscription businesses where you’re recognizing revenue over time — those are all affected,” he says.