The grouphelping the Financial Accounting Standards Board clarify and implement the proposedcurrent expected credit loss model praised the latest draft as flexible and scalablefor institutions of all sizes.
The changescould placate executives concerned about the standard's workability at their smallbanks and credit unions. Still, the CECL transitionresource group spent much of its two-hour meeting with FASB on April1 parsing the language of certain examples and weighing their benefits and pitfalls.The group is made up of representatives from banks, credit unions and accountingfirms as well as observers from various regulatory bodies. It is tasked with analyzingthe proposal, soliciting feedback and bringing implementation issues to the board.
Groupmembers praised the latest version of CECL for being scalable and flexible, with one member even complimentingFASB's staff for including a historical loss rate example — the loss method thatmany community bankers are alreadyusing to calculate their allowance for loan and lease losses.
"Ithink text of the revised standard … clearly [shows] there is an intent to makethis standard flexible and scalable, and to allow community banks to use their experienceand understanding of the local business marketplace to meet the requirements ofthe new standard and ascertain the most appropriate allowance for loan and leaselosses," said Timothy Zimmerman, president and CEO of Monroeville, Pa.-basedStandard Financial Corp.and unit Standard Bank PaSB."We think this draft validates what we've been doing in practice while it addsto the ability to provide for expected credit losses. However, it doesn't requireus to increase reserves if an increase isn't really appropriate and allows us touse historical loss data where appropriate. We think that's very important."Standard Bank had $466.2 million in assets at the end of 2015.
"Webelieve it is the intent of the standard to allow community bank management to usecurrent systems — and yes, the all-important spreadsheets and narratives — coupledwith enhanced techniques to evaluate and document the adequacy of the allowance,"Zimmerman continued. "It's clear from reading the draft that the requirementis generally scalable, which we think provides for a high degree of flexibility."
Staffin Citigroup Inc.'s financeand risk organizations looked through the updated draft and "feel comfortable"that the bank can implement it, said Dan Palomaki, Citi's managing director of accountingpolicy. He encouraged FASB to issue the final standard, which has been delayed multipletimes and is now slated for release in mid-2016.
"Wethink that the time is right for the board to move forward to finalize the standard.I'm sure there will be implementation issues that we'll all work together collectivelyon, but we're ready to get going and remove the uncertainty," Palomaki said.
OCC associatechief accountant Jeffrey Geer said his team and other financial regulators saw thenew draft as a "significant improvement" over earlier iterations in its"understandability and addressing stakeholder concerns about operations."
The groupspent much of the Friday morning meeting focused on language in the standard thatmay prove confusing or be misinterpreted during implementation. The group also exploredthe usefulness of the examples that are currently in the draft.
Whilethe examples will bring certain institutions comfort by explaining how to proceedin specific situations, some group members expressed concern that the examples couldconstrict and limit other institutions that feel like they must follow the methodsin the examples rather than use other accepted methods."We've got clientsthat span the sophistication spectrum. For some, prescription is dangerous becauseit almost limits their ability to get smarter over time if they find a better estimateand return. If there's prescription in the standard, they might be restricted fromusing that [better estimate]," said Graham Dyer, senior manager of the accountingprinciples consulting group at Grant Thornton. "But I think for those at theother end of the sophistication spectrum, it's really helpful to have that sortof stuff in there. I think it's important to allow for both."
A memberof the transition group also called attention to a potential source of tension betweenaccountants and auditors. Financial regulators have said they will be accommodatingto institutions and their estimates under CECL, but executives and others have saidthere is great uncertaintyas to how external auditors will approach the issue at individual institutions.During the meeting Robert Wadley, a partner in the national accounting assuranceservices group at Ernst & Young, said audit guidance from the Public CompanyAccounting Oversight Board could provideclarity and continuity between the accounting and auditing standard setters.
"Iwould generally say that when the FASB puts out a great standard, we don't neednew audit standards specific to those accounting standards. But I do think thismight be one of those instances … where we need audit guidance that is specificto an accounting standard," Wadley said.
The PCAOBis a nonprofit corporation established by Congress to oversee the audits of publiccompanies, brokers and dealers to protect investors and the public interest by promotingaccurate and independent audit reports. Barbara Vanich, the associate chief auditorat the PCAOB, was present at the meeting as an observer, and FASB member LawrenceSmith joked that she was taking notes after Wadley's comment.
FASBand its staff will evaluate the feedback from the transition resource group as theycontinue drafting the final CECL standard. Smith said the board will meet "sometimetoward the end of April" at which point the staff will summarize the proposal'scosts and benefits, as well as its effective date. Smith said FASB is revisitingthe effective date because of repeated delays in the standard's release.
"Whilewe have made a decision already, we realize the standard has not hit the streetwhen we were originally anticipating it would hit the street," he said. "Individualboard members will have to make an assessment as to whether the last vote is thefinal vote or whether we change that, and we would do that at that meeting as well.From there, [FASB Chair Russell Golden] will ask for a final vote on the standardand then we will proceed with final drafting. Our hope is that we issue the standardby June 30."
The sameday as the meeting, the Independent Community Bankers of America heralded the increasedflexibility and scalability of the new draft in a press release. "By allowingcommunity banks to evaluate and adjust their loan-loss amounts using qualitativefactors, historical losses, and current systems, such as spreadsheets and narratives,FASB has made important changes to its proposed accounting standard," the releasesaid.
But theNational Association of Federal Credit Unions argued that the change in the standard'slanguage merits the "issuanceof an updated exposure draft for public comment" before FASB proceeds withthe final publication of the accounting standard. In an April 1 letter the tradeorganization urged FASB, a private nonprofit, to voluntarily abide by the AdministrativeProcedure Act that requires a federal agency to offer a comment period after ithas made a substantive change to a rule such that the rule is "is no longer a logical outgrowthof the proposal."
"Sincethe initial credit losses exposure draft has likely been substantively amended,we believe that the FASB should voluntarily issue an updated exposure draft forpublic comment," the letter stated.
S&P Global Market Intelligence recently surveyed bankers and credit union professionals about CECL. For coverage of the survey results, see:
What banks, credit unions think about CECL
Bankers fear costs will far outweigh benefits of FASB loan-loss change, survey shows
Many bankers have taken little or no action to prepare for CECL
Ahead of CECL, the well-prepared minority
CECL will lead to increased costs, but how much is anyone's guess
Click here for more in-depth CECL coverage.