FASB credit losses plan likely to be detrimental to CUs, warns CUNA
WASHINGTON (2/20/15)--A Financial Accounting Standards Board (FASB) proposal regarding credit losses is "likely to have a significant, detrimental impact on a number of credit unions and their members." CUNA President/CEO Jim Nussle wrote to all seven FASB board members this week to reiterate the message sent last year to FASB: that the board should refrain from imposing the proposed changes on credit unions.
The CUNA letter is part of the association's ongoing leadership efforts to communicate concerns on behalf of credit unions to FASB on this issue.
FASB has proposed credit loss reporting changes that would use a single "expected loss" measurement for the recognition of credit losses, replacing the multiple existing impairment models in U.S. generally accepted accounting principles (GAAP) that primarily use an "incurred loss" approach. FASB's approach would require greater loan loss allowances in many cases than under current GAAP.
FASB continues to work on the proposal, which was originally proposed in December 2012. At a Feb. 11 board meeting, FASB indicated that it expects a final rule to be issued in the third quarter of 2015.
"During the height of the recent recession, under current GAAP, credit unions overfunded their provisions for loan and lease losses and in general, maintained their allowance accounts in surplus. Such actions caused credit union earnings to be understated during the recession," Nussle wrote.
"To the extent the proposal requires further increases to even higher levels of the allowance account, these distortions would be even greater."
Nussle added that the unwarranted increase in many credit unions' allowance accounts would result in a reduction in retained earnings. This is turn could lead to a reduced capital ratio, which could trigger prompt corrective action implications for credit unions that do not currently have those concerns.
Another major concern CUNA has with the proposal is that it would add additional regulatory burden to credit unions by requiring extensive resources to analyze the loan portfolio on a "granular level" to calculate and project life of loan losses.