Group of Banks Ask FASB to Change Credit Loss Standard

November 19, 2018

Twenty-one regional banks are asking the Financial Accounting Standards Board (“FASB”) to consider a different approach for calculating loan loss under Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. In a letter submitted last week to the FASB, the group of banks warned that the credit loss standard could lessen regulatory capital and cause banks to restrict their lending in economic downturns.

The regional banks propose amending the requirement for recognizing credit losses to alleviate any drastic changes in earnings and mitigate problems the standard may cause with maintaining adequate capital reserves. While the proposal maintains the lifetime allowance concept under ASU No. 2016-13, the banks also call for credit losses to be calculated in three parts rather than one.

For financial assets that have not been previously impaired, loss expectations in the first year would be recognized as losses in the income statement, and loss expectations past the first year would be recognized in accumulated other comprehensive income. For impaired financial assets, a bank would have to recognize its lifetime expected credit losses in earnings.

Daryl Bible, chief financial officer of BB&T and one of the letter’s cosigners, praised the group’s proposal as an elegant solution that would call for the impact of loss expectations during the first 12 months to be recognized in earnings. Anything past that time would be recorded under other comprehensive income. Bible also hopes the FASB takes the banks proposal seriously and amends the guidance before bad accounting occurs.

FASB members are reviewing the group’s proposal and plan to hold a public meeting to evaluate it at a later date.