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Banks Express Concerns over FASB Credit Loss Standard

Banking institutions of all sizes are preparing to implement the Financial Accounting Standards Board’s (“FASB”) new standard that requires the calculation of future losses on bad loans versus disclosing losses that have already occurred. While the largest accounting update in years for banks requires an additional workload, some lenders are uncertain about how to sift through their data for estimating future losses and setting aside cash reserves.

At the American Institute of Certified Public Accountants’ National Conference on Banks & Savings Institutions last week, Federal Savings Bank executive vice president and CFO James Brannen touched on the difficulties a small bank face while preparing for Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Brannen noted that while the issue isn’t that his bank doesn’t have the data, the bank doesn’t have it in a readable way. He remarked that it is different to having the data, capturing it going forward, and having it in a way that allows a bank to bring it together.

Larger banks are facing similar challenges. Bank of America’s Julie Harris said banks already comb through large amounts of data for making lending decisions, but the standard requires economic forecasting and other new components. Whenever a new component that hasn’t been used for financial reporting is added, she argued, complexity increases.

Bank regulators appear to agree with concerns that ASU No. 2016-13 will require a heavily workload. During the same conference, the Federal Reserve’s Joanne Wakim acknowledged that the data banks possess might not be easily accessible. Wakim stated that it’s more difficult to summarize or get information on a bank’s loan system. She also commented on the inconsistency of accessible data from year to year, causing uncertainty on how much a bank should spend or invest in searching its loan files.

Wakim encouraged banks to begin gathering data immediately. She also asked banks to retain information they already have, which will give them a few years before having to implement the new standard.

ASU No. 2016-13 becomes effective in 2019 for public businesses that file with the Securities and Exchange Commission (“SEC”). Non-SEC-filing public businesses must wait to implement the standard in 2020, and all other businesses (e.g., nonprofits) within the scope of Topics 960 through 965 must implement the amendments in 2020, and interim periods within fiscal years starting after December 15, 2021.

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