Banking Regulators to Finalize Rule Offering Capital Relief
On September 18, federal banking regulators said they plan to finalize a rule to ease the effect of FASB’s credit loss standard by the first quarter of 2019. The rule change offers banks the option to phase in, over a period of three years, the “adverse effects” on regulatory capital they expect when they adopt FASB’s credit loss standard. The standard, FASB’s most important response to the 2008 financial crisis and one of the biggest changes to bank accounting in recent years, requires banks and other businesses to estimate expected future losses on failing loans and certain types of debt securities. It is expected to make banks increase the reserves they set aside to cover losses on loans and securities. The proposed rule change would let banks soften the blow to capital by spreading out the effect of the accounting change over three years.
Audit Practice Alert for Revenue Recognition May Aid Implementation of Credit Loss Standard
Auditors who are looking for help examining banks’ implementation of FASB’s credit loss standard can refer to the interpretive guidance for revenue recognition accounting, PCAOB member James Kaiser said. “Much of the guidance is applicable in the implementation of other new accounting standards, including CECL [current expected credit losses],” Kaiser said on September 17 at the AICPA’s National Conference on Banks and Savings Institutions in National Harbor, Maryland . Auditors can look to the staff guidance for “auditing management’s transition disclosures in the notes to the financial statements, auditing transition adjustments, considering internal control over financial reporting, identifying and assessing fraud risk, evaluating whether credit loss estimates are recognized in conformity with the applicable financial reporting framework, and evaluating whether financial statements include the required disclosures regarding the expected credit loss,” said Kaiser.
Chief Accountant Stresses Need for Documentation With Credit Loss Standard’s Implementation
SEC Chief Accountant Wesley Bricker urged banks and other financial companies to carefully plan the switch to FASB’s new credit loss standard, which is scheduled to go into effect in 2020. “Change in accounting standards is easier said than done, but as we saw with the revenue recognition standard, it can be accomplished with sufficient planning and consistent communication among management, the audit committee, and the external auditor,” Bricker said in a speech at the AICPA’s National Conference on Banks and Savings Institutions in National Harbor, Maryland, on September 17. Bricker said banks should have a process and controls in place to implement the credit loss guidance in Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses Table of Contents (Topic 326): Measurement of Credit Losses on Financial Instruments, in a reprise of the advice he gave U.S. companies as they implemented FASB’s revenue recognition standard. Bricker also said banks need to understand the potential effects of the standard on their financial position because it calls on banks to set aside reserves to cover losses when they originate the loans through the standard’s current expected credit loss (CECL) model.