A proposal to phase in over three years the “day one” adverse effects on credit unions’ regulatory capital under the “current expected credit losses” (CECL) accounting standard, and exempting small credit unions from using the standard to figure loan loss reserves, was published in the Federal Register Wednesday, with public comments due Oct. 19.
The proposed rule, issue last month by the National Credit Union Administration (NCUA) Board, would phase in the day-one effects on a federally insured credit unions’ (FICUs) net worth ratio over 12 quarters. This phase-in would apply to all FICUs that adopt the CECL methodology for fiscal years beginning on or after Dec. 15, 2022, without exception. Credit unions adopting the methodology earlier would not qualify for the phase-in.
Additionally, the FICUs having less than $10 million in assets (1,291, or roughly one-fourth of all FICUs, based on March 31 call report data) would no longer be required to determine their charges for loan losses in accordance with generally accepted accounting principles (GAAP). They “may instead use any reasonable reserve methodology (incurred loss), provided that it adequately covers known and probable loan losses,” according to the proposed rule summary.
Under the proposed rule, FICUs would still be required to calculate their net worth in accordance with GAAP (as generally required under the statutorily required prompt corrective action [PCA]) system); and would continue to be required to account for CECL for all other purposes, such as call reports.