The Financial Accounting Standards Board (FASB) will meet Wednesday to continue working out the final issues with its current expected credit loss (CECL) proposal, including an assessment of costs and benefits as well as an effective date for the new standard. Two CUNA members are on the CECL working group, and reported earlier this month that progress has been made toward making it more palatable to credit unions.
Specifically, the current version of the proposal would use an “expected loss” measurement for the recognition of credit losses, requiring complicated modeling to cover the life of the loan. This would replace the various existing impairment models in U.S. generally accepted accounting principles that generally use an “incurred loss” approach.
Revisions to the proposal announced earlier this month make the proposal more flexible. Revisions state that there is no one methodology that has to be used, and that FASB’s intention is that each institution apply the method that is appropriate for its portfolio based on the knowledge of their businesses and processes.
These changes would allow smaller, community-based financial institutions to evaluate and adjust their loan-loss amounts using qualitative factors, historical losses and current systems. This would allow credit unions to scale the standard, allowing them to avoid the use of complex modeling systems.
These expected changes do not however address credit unions’ other major concern with CECL, that it will require up-front booking of expected losses over the life of loans as they are originated.
Susan Hannigan, senior vice president/chief financial officer at Jeanne D’Arc CU, Lowell, Mass., and Doug Wright, chief financial officer at Mission FCU, San Diego, are CUNA member credit unions and are on FASB’s CECL transition resource group.
The group is designed to analyze and discuss implementation issues that could arise when organizations implement the upcoming CECL standard, which is expected to be finalized later this quarter.