STRATFORD, Conn.-Credit unions are worried a proposal by the Financial Accounting Standards Board (FASB) to use an expected loss method to measure loan losses will require them to increase loan loss reserves and are calling on the FASB to withdraw the proposal.
"There are many reasons to oppose the [proposal]," wrote Peter Putnam, chief financial officer of Credit Union of Southern California, in a comment letter to the FASB. "One reason is that the rule will likely require immediate increases to the Allowance for Loan and Lease Losses, thus depleting capital at a time when financial institutions are beginning to rebuild capital."
The FASB proposal on Credit Losses for Financial Instruments would require credit unions to use a single "expected loss" measurement for the recognition of credit losses, which would replace the multiple existing impairment models that generally use an "incurred loss" approach. Under the proposal, the reporting entity would be required to estimate the cash flows on an asset that it does not expect to collect, using all available information, including historical experience and forecasts about the future.
According to Ronald Kampwerth, CFO at Anheuser-Busch Employees' CU, the proposal would require the estimate of credit losses to include reasonable and supportable forecasts that affect the expected collectability of the assets' [loans'] remaining contractual cash flows. "We need to leave economists, or our attempts at being economists, out of this determination of future credit losses," wrote Kampwerth in a comment letter. "They all have varying and unpredictable opinions, but they cannot argue past events and current known events."
Both credit union CFOs argue the FASB proposal ignores one of the main principles of accounting: the matching principle. "This occurs because the interest income from the loan portfolio will be recognized over the life of the portfolio, while the credit losses will be recognized immediately," wrote Credit Union of SoCal's Putnam. "Recording a provision for loan and lease losses today for losses that may or may not occur in the future is recording an expense that has not been incurred, and is not proper."
A 'Subjective Exercise'
"We agree that using relevant information about past events is decision-useful to management and the board," wrote Thomas Alter, SVP-research and development for Genisys CU. "Genisys believes that the proposed new method will not provide more useful decision-making information," wrote Alter. "Trying to determine the value of an asset based on the remaining cash flow expected to be received is a subjective exercise."
FASB is accepting comments through April 30.
