Updated “frequently asked questions” (FAQs) about the new accounting standard on credit losses hit the street Wednesday, combining new questions and answers with those issued two and three years ago and replacing others.
The Federal Deposit Insurance Corp. (FDIC), in Financial Institution Letter (FIL) 20-2019, said the set of FAQs (issued jointly with the Office of the Comptroller, Federal Reserve Board, and National Credit Union Administration) continue to focus on the application of the current expected credit losses (CECL) methodology for estimating credit loss allowances, and related supervisory expectations and reporting guidance.
More specifically, the letter states, the new set of FAQs address: collateral-dependent loans; reasonable and supportable forecasts; internal control considerations related to data; and the continued relevance of concepts, processes, and practices in existing supervisory guidance on the allowance for loan and lease losses. The agency said they combine new FAQs with those issued in 2017 and 2016 and replace the FAQs from a 2017 FIL (41-2017).
The agency said the FAQs reflect the Financial Accounting Standards Board’s (FASB) recent amendment to the effective date of the accounting standard for nonpublic business entities. They continue to emphasize the “scalability of CECL to institutions of all sizes, and the expectation that community institutions are not expected to need to adopt complex modeling techniques to implement the new accounting standard,” it said.
The letter notes that under current U.S. generally accepted accounting principles (GAAP), financial institutions use allowance estimation methods scaled to their size and complexity. The letter states that agencies expect a similar array of credit loss estimation methods will be used under CECL – although inputs to allowance methods will need to change to properly implement CECL, the letter states.
“The agencies expect institutions to make good faith efforts to apply the new credit losses standard in a sound and reasonable manner,” the letter states. “Accordingly, institutions should continue preparing to implement the standard.”
Late last month, the federal banking agencies announced they were delaying until July 1 the effective date of their regulatory capital rule that addresses the CECL accounting standard. The original effective date was April 1. The agencies said the delay was related to the late publication of the final rule due to the partial federal government shutdown. However, they reiterated past statements that banking organizations still may early adopt the final rule prior to the new effective date.
New Accounting Standard on Credit Losses: Frequently Asked Questions