Article

Arrival of PCAOB Guidance on Credit Loss Model Unknown

June 28, 2018

The Public Company Accounting Oversight Board’s (“PCAOB”) interpretive guidance for the Financial Accounting Standards Board’s (“FASB”) new current expected credit losses (“CECL”) model is unlikely to be published before the audit regulator’s proposal on auditing accounting estimates is finalized. Release No. 2017-002, Proposed Auditing Standard—Auditing Accounting Estimates, Including Fair Value Measurements, was issued by the PCAOB to enhance the requirements for auditors examining hard-to-value assets and liabilities such as oil company reserves. Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, is effective in 2020, and will require companies, most commonly banks, to establish reserves based on expected credit losses.

Since the PCAOB experienced a complete membership turnover earlier this year, the new members are currently reviewing the audit regulator’s standard-setting agenda. The new PCAOB members plan to finish existing projects on the previous board’s agenda. However, projects like issuing staff guidance for the FASB’s credit loss standard have no projected end date.

During the board’s Standing Advisory Group meeting on June 5, PCAOB acting chief auditor Barbara Vanich remarked that the staff is examining the implementation of ASU No. 2016-13 and is occasionally meeting with bank examiners and industry groups to determine their progress with the new financial reporting. Financial professionals believe auditors will struggle with financial statements prepared using the CECL model, and that the PCAOB’s interpretive guidance could help auditors become consistent in how they assess the new accounting method.