FASB proposes amending transition requirements, scope of CECL standard

Amending the transition requirements and scope of the current expected credit losses (CECL) standard issued by Financial Accounting Standards Board (FASB) is the aim of a proposal issued Monday by the group. Comments are due Sept. 19.

The proposal comes in the wake of other proposals by the federal banking regulators to deal with the impact of the accounting standard, which begins taking effect for some financial institutions next year.

According to a release from the accounting standards group, the proposed “accounting standards update” (ASU) addresses areas of uncertainty brought to its attention by stakeholders in the CECL standard. The release added that the ASU is intended “to reduce transition complexity and represents our ongoing commitment to support a successful transition” to the group’s standards.

FASB said the proposal makes changes in two areas:

  • It would mitigate transition complexity by requiring entities other than public business entities to implement it for fiscal years beginning after Dec. 15, 2021, including interim periods within those fiscal years. “This would align the implementation date for their annual financial statements with the implementation date for their interim financial statements,” the FASB release stated.
  • It would clarify that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leases standard, the release stated.

CECL is an accounting standard issued by FASB in 2016; it is scheduled to begin taking effect next year. As proposed, the CECL standard replaces the existing incurred-loss methodology for certain financial assets.

In May, a proposed rule addressing the effects of the new CECL standard on banks’ regulatory capital was issued by the three federal banking regulators; comments closed July 13.

The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Fed), and the Federal Deposit Insurance Corp. (FDIC) sought public comment on a joint proposal intended to identify which credit loss allowances under CECL are eligible for inclusion in regulatory capital. The proposal also provided banking organizations the option to phase in the day-one adverse effects on regulatory capital that may result from the adoption of CECL, so capital increases associated with CECL implementation could be phased in over time.

Under the proposal, the phase-in option would have to be elected in the quarter that the institution first reports its credit loss allowances as measured under CECL. If the election isn’t made then, it would no longer be available, and the bank would be required to reflect the full effect of CECL in its regulatory capital ratios as of the banking organization’s CECL adoption date. “For example, a banking organization that adopts CECL as of January 1, 2020, and does not elect to use the CECL transition provision in its regulatory report as of March 31, 2020, would not be permitted to use the CECL transition provision in any subsequent reporting period,” the proposal states.

Under the proposal, a depository institution holding company subject to the Fed Board’s capital rule and each of its subsidiary insured depository institutions would be eligible to make a CECL transition provision election independent of one another.

FASB proposes narrow-scope improvements to credit losses standard (CECL)