Letter outlines updates to CECL FAQs – and reiterates ‘take steps in advance’

Credit unions need to take steps in advance to ensure they can implement the new “current expected credit loss” (CECL) accounting standard, even though the new standard doesn’t take effect until Dec. 31, 2021, the head of the federal credit union regulator said in a recent “Letter to Credit Unions.”

National Credit Union Administration (NCUA) Board Chairman J. Mark McWatters wrote that board directors and senior management of credit unions should become familiar with the new accounting standard from the Financial Accounting Standards Board (FASB), issued in June 2016, to “become familiar with the new accounting standard” to assess it “differs from the existing incurred loss model.” The FASB issued the standard as Accounting Standards Update (ASU) 2016-13, Topic 326, Financial Instruments – Credit Losses.

His letter, to all federally insured credit unions, accompanied a list of “frequently asked questions” (FAQs) developed with other federal financial institution regulators “to provide credit unions, examiner staff, and other stakeholders with a better understanding of the CECL requirements and associated supervisory expectations.” The FAQs updated an earlier list issued last December.

“Once familiar with the standard, different allowance estimation methods should be evaluated for appropriateness within your credit union,” McWatters wrote.

The agency leader also pointed out that NCUA does not plan to begin evaluating a credit union’s implementation efforts until sometime after 2018.

“As the NCUA has previously stated, CECL may result in a decrease in net worth upon implementation of the standard for some credit unions,” McWatters wrote. “The NCUA will train examiners to take this into account when evaluating capital adequacy. To assist with this, we will add a new ratio to the Financial Performance Report to illustrate net worth differences prior to and after implementation of CECL. Credit unions should evaluate and plan for the potential impact of the new accounting standard on regulatory capital.”

NCUA Letter to Credit Unions: Frequently Asked Questions on the New Accounting Standard on Financial Instruments – Credit Losses