The Financial Accounting Standards Board’s current expected credit losses (CECL) standard is one of the most significant and far-reaching changes to generally accepted accounting principles (GAAP) I have witnessed in my over 40 years as a certified public accountant.
Accounting standards that result in high-quality, comparable financial reporting are vital to an efficient market. And, certainly, the financial statements of credit unions need to reflect the estimated credit losses from their lending transactions properly.
But as a policy matter, I still have reservations about the need for CECL, and I remain concerned about its potential effects on lending and financial stability.
CECL will significantly affect many credit unions’ net worth ratios and lead to an increase in their operating costs. While the credit union system’s net worth is strong and CECL’s effects on it should be manageable overall, a significant number of credit unions could have their net worth fall below well capitalized or have their net worth ratios reduced to the point where they may need to curtail lending or deposit growth.
This would be an unfortunate and vexing outcome as credit union lending practices were not the cause of the financial crisis a decade ago, and credit unions principally underwrite loans in a prudent manner.
Also, most credit unions are modest in size with limited resources to spend on accountants and consultants, and changes to their accounting procedures and systems. Credit unions need and deserve cost-effective methods to estimate loan losses and comply with GAAP. Therefore, I am pleased with several recent developments that will help credit unions make the transition to CECL.
First, the NCUA’s general counsel determined the NCUA board has the authority to phase in the day-one adverse effects on regulatory capital that may result from the adoption of CECL. I support a rule that would phase in CECL’s impact on credit union net worth ratios over three years, just like the relief the banking agencies recently provided banks.
I hope to see the NCUA board act on such a rule in the near future. A rule like this would go a long way toward providing relief to credit unions that could see relatively large increases to their loan loss reserves when the new accounting standard becomes effective.
Second, in July of this year, FASB issued a second staff Q&A on CECL, which clarified that “reasonable and supportable forecasts” required by CECL can be scaled to the size and complexity of an institution, and do not necessarily require modeling or economic forecasting.
Most credit unions have ordinary consumer and small business loan portfolios. With this clarification, few credit unions will need to do economic forecasting or sophisticated modeling to estimate loan losses.
FASB’s clarification about forecasts, combined with other simplified options that it indicated are acceptable to estimate losses for less-complex financial instruments, will allow credit unions to adhere to GAAP without having to spend a lot of money on consultants.
Finally, FASB proposed extending the effective date of CECL for private companies, not-for-profit organizations and certain small public companies to Jan. 1, 2023. The extension of the effective date for smaller or private entities would provide them more time to prepare for CECL and to learn from the experiences larger public entities have had with its implementation. A delay like this would be a genuine benefit for credit unions.
I want to thank FASB for listening to stakeholders, and I respect the independence and role of FASB in setting financial accounting and reporting standards. Yet, there is still much work to be done.
Misconceptions and a lack of clarity and certainty surrounding the standard remain. For example, how individual CPA firms will approach auditing an institution’s CECL methodology, and the potential burden and cost associated with this is still an area of uncertainty and anxiety for credit unions.
It is also vital that accounting practitioners have clear and unambiguous expectations for the range of acceptable methods their clients can employ to develop point-in-time estimates of credit losses in accordance with GAAP. It is essential that these expectations are properly scaled to the size and complexity of institutions like credit unions.
FASB and the accounting profession must also do more to educate credit unions on the standard to minimize its unintended consequences. Under Chairman Hood’s leadership, I know the NCUA will do its part to provide credit unions with additional information and training on CECL, and to educate our examiners on the standard.
