The Financial Accounting Standards Board is running out of time to address the complex questions banks need answered to implement a new loss accounting standard.
The current expected credit loss standard, or CECL, will overhaul how financial institutions model and account for loan and lease losses when it goes into effect in 2020. To prepare for the change, some banks plan to conduct simulations, or "parallel runs," of their new CECL models as early as 2019, a year in advance of the effective date. To aid with that effort, FASB met on June 11 to hammer out how to apply CECL in five areas after banks asked for more guidance.
FASB spent three hours discussing five questions with its advisory group, which includes representatives from banks, credit unions and accounting firms, as well as observers from various regulatory bodies. The topics focused on nuanced and technical scenarios; at some points, even members of the advisory group voiced confusion around various approaches and guidance.
During the discussion of capitalized interest, several advisory group members suggested the board should include an example in the guidance to demonstrate how they could apply it. Staff demurred, saying there was a potential that an example might cause even more confusion.
One advisory group member responded: "I want to assure you, that can't be the case."
FASB staff said they would look into including an example. The board will release the meeting minutes with a summary of its discussion and the various conclusions in the coming days, after getting sign off from board members, staff and members of the advisory group.
As banks are gearing up for CECL, investors and other financial statement users have also taken a greater interest in the standard, FASB member R. Harold Schroeder said. The board is conducting investor education around CECL, but Schroeder said FASB is not going to answer one big question on banks' minds: How much?
"That is a question they're always asking at these presentations: 'How much is this going to cause the reserves to go up?'" Schroeder said. "We've been very careful to say, 'Here are some things to consider — the mix of loans, how you've applied the standard in the past' — but we're not answering that question. We're leaving it up to the banks to answer that."