Final interagency policy statement on credit losses accounting (CECL), guidance on credit risk review systems issued

An interagency policy statement proposed last October on the interpretation and application of the accounting industry standard for the treatment of credit losses has been made final, along with interagency guidance on credit risk review systems.

The final policy statement and guidance, which will be published the Federal Register, were issued jointly by the Federal Reserve Board, Federal Deposit Insurance Corp. (FDIC), National Credit Union Administration (NCUA), and Office of the Comptroller of the Currency (OCC).

The interagency statement on credit losses accounting is intended to “promote consistency in the interpretation and application of the Financial Accounting Standards Board’s credit losses accounting standard, which introduces the current expected credit losses (CECL) methodology,” the agencies said. The statement will be effective at the time of each institution’s adoption of the credit losses accounting standard, they said.

The policy statement describes the measurement of expected credit losses using the CECL methodology and updates concepts and practices detailed in existing supervisory guidance that remain applicable.

There were some technical changes from the proposed statement. For example:

  • The final policy statement is revised to indicate that the list of qualitative factor adjustments that may be considered for debt securities are specific to held-to-maturity debt securities.
  • The statement is revised to align the terminology with FASB ASC Topic 326. “Accounting policy elections related to accrued interest receivable may be made by class of financing receivable or major security-type,” according to an analysis of comments received.

Commenters also had a different interpretation than the agencies presented on how to report the amount needed to adjust liability for expected credit losses for off-balance-sheet exposures. The proposed statement said this is reported as an “other” noninterest expense, but four commenters, citing FASB ASC Topic 326, said it should be reported as part of credit loss expense.

“In response to the commenters’ recommendation, the FFIEC [Federal Financial Institutions Examination Council] will reconsider whether to modify the instructions for the Consolidated Reports of Condition and Income,” the agencies wrote.

They also noted that NCUA Call Report Form 5300 currently requires that the expense needed to adjust the liability for expected credit losses for off-balance-sheet credit exposures should be reported as a separate provision expense in the income statement. The final policy statement, the agencies said Friday, is revised to eliminate any reference to the income statement category in which amounts needed to adjust the liability for expected credit losses for off-balance-sheet credit exposures should be reported in the agencies’ regulatory reports.

The final guidance on credit risk review systems, also revised “with targeted changes and clarifications,” replaces Attachment 1 of the 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses. It discusses sound management of credit risk; a system of independent, ongoing credit review; and appropriate communication regarding the performance of the institution’s loan portfolio to its management and board of directors.

Federal financial regulatory agencies issue interagency policy statement on allowances for credit losses and interagency guidance on credit risk review systems

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