The new Current Expected CREDIT Loss (CECL) model is the centerpiece of the accounting standards update issued June 16 by the Financial Accounting Standards Board.
The updated standard does not prescribe a specific loss estimation methodology but when effective, institutions will need to measure and record immediately all expected credit losses over the life of their loans and other financial assets based on "historical experience, current conditions, and reasonable and supportable forecasts." Some stakeholders view it as the biggest accounting change ever for financial institutions. Now that it has been adopted, can anything be done to mitigate its impact?
When FASB changes Generally Accepted Accounting Principles (GAAP) as it applies, credit unions can't escape. Under Section 1782 of the Federal Credit Union Act, accounting principles applied to credit union reports of financial condition filed with the NCUA must be uniform and consistent with GAAP, although the NCUA has authority to determine that an accounting principle IS NOT APPROPRIATE for a credit union. In that case, the NCUA may apply a different principle, as long as the principle is "no less stringent" than GAAP. In other words, NCUA has latitude in applying accounting principles, including CECL, at least on a case-by-case basis. Yet FASB sets GAAP standards, not NCUA, and the agency's role is to work with the other federal financial regulators on CECL implementation. It is unlikely one regulator will be more lenient than the others, since they do not want to risk sanctioning an approach that would not be considered consistent with GAAP, or with its regulatory counterparts.
Even so, NCUA Board Member Mark McWatters, a CPA and attorney, has urged the agency to coordinate with its counterparts, to achieve flexibility both in the development of additional guidance and in examiner assessments once the new standard takes effect. And the compliance date for fiscal years after 12/15/2020 is not that far away, given the significant efforts a number of practitioners have indicated will be required for institutions to educate boards and train staff on CECL; revise their credit loss methodology; provide for necessary data collection, storage, and security, and assess capital implications of making Allowance for Loan and Lease Losses (ALLL) adjustments.
FASB engaged in significant outreach as the standard was developed yet credit unions continue to ask, does the FASB's rational for CECL fit credit unions? Did FASB's cost/benefit analysis take the impact on credit unions into consideration sufficiently? Did NCUA provide a cost/benefit analysis to FASB? If it did, credit unions should see it. These questions are fair but won't help implementation.
Going forward, FASB should take a greater role in working with the financial regulators to ensure clarity of expectations, indicate their upcoming guidance is consistent with GAAP and minimize negative impacts of the standard. Likewise, while mindful of FASB's independence, key members of Congress should continue their concern and monitor this issue as it unfolds. This should include holding hearings that involve credit unions throughout implementation to ensure the benefits of CECL are not outweighed by costs including depletion of credit union net worth/capital.
Mary Dunn is a founding partner of CU Counsel, Pllc, a law firm in Washington, focusing on credit union legal and advocacy issues. Scott Waite is an executive consultant and former EVP/CFO of Patelco CU.
