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SEC Chief Accountant Offers Banks Advice on Implementing Credit Loss Standard

September 25, 2018

Along with attending a session with lawmakers and banking representatives on the Financial Accounting Standards Board’s credit loss standard, the Securities and Exchange Commission’s (“SEC”) Wesley Bricker gave a speech on the matter at the American Institute of Certified Public Accountants’ National Conference on Banks and Savings Institutions in Maryland.

During his speech, the SEC chief accountant told financial companies to be careful when implementing Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. He advised banks to have an implementation process in place to understand the possible impact of the standard on their financial situation. Bricker’s reasoning is due to ASU No. 2016-13 requiring banks to establish reserves to protect against losses when creating the loans via the current expected credit loss model.

In addition, Bricker suggested that banks consider federal securities laws and SEC guidance to confirm that their books, records and accounts correctly show asset transactions. He also said banks should ensure that internal accounting controls offer reasonable assurance that the transactions are documented in line with U.S. GAAP. Another suggestion given was documenting the methods banks use every period to determine the total of loan losses to be disclosed and the explanations for that determination.

Bricker said the principles under SEC Staff Accounting Bulletin (“SAB”) No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues, (SAB Topic 6-L) are still applicable. Principles on preserving documents and supporting evidence for confirming the credit loss estimate were deemed most important. Another viewpoint he offered was audit committees are important due to their oversight of a company’s financial reporting. Bricker urged banks’ management to share with their audit committees implementation plans and progress updates, including details on any modifications to internal control over financial reporting. He also recommended that banks disclose to investors any anticipated effects the new standard will cause.

Finally, Bricker told banks to be transparent in their financial reports about the disclosures related to the new accounting. He said management should detail their methods and the key decisions that support the accounting change. Transition disclosures must calculate the impact of transitioning to the expected credit loss model for the banks’ loan portfolios.