Is accounting fatigue a valid reason to delay a complex new standard?
The American Institute of Certified Public Accountants believes it should be. The trade group has asked the Financial Accounting Standards Board to give privately held companies including banks, a one-year reprieve on a new lease-accounting standard that eliminates the special treatment for operating leases.
While publicly traded companies adopted the standard on Jan. 1, privately held firms have until next January to make the change. The AICPA wants to push that deadline back to 2021, pointing to other changes, including the looming Current Expected Credit Loss standard, or CECL, as a concern. A delay would benefit more than 4,000 privately held banks, not to mention every credit union, according to industry observers.
“With the significant and complex standards recently issued by the [FASB] including leases, revenue, and CECL,” the compliance burden on smaller companies “should be given special consideration,” Michael Westervelt, chairman of the AICPA’s technical affairs committee, wrote in a Monday letter to the accounting standards board.
The request comes as FASB grapples with persistent calls — including many from lawmakers — to delay CECL implementation, which some observers have termed the biggest change to bank accounting in decades. CECL would require lenders to forecast lifetime credit losses when a loan is booked, replacing the current standard that lets banks recognize losses only when deterioration is readily apparent.
Westervelt noted in his letter that privately held companies are also struggling with FASB’s revenue recognition standard, which took effect for them in January. He pointed to recent polls that showed that more than half of privately held companies "do not feel they have the adequate controls in place to adequately adopt all provisions of this standard."
The standards board plans to discuss the AICPA's leasing request at an upcoming meeting, spokeswoman Christine Klimek said.
Concerns about accounting overload are real, given the major changes the standards board is ushering in with its three new standards, said Kristi Illuzzi, senior technical manager for the AICPA's technical issues committee.
“I’ve read articles that claim FASB is cramming a decade’s worth of new standards into a few years, and I think that’s a fair assessment,” Illuzzi said. “I really can’t think of a time where FASB issued so many significant standards in less than a 10-year period.”
To convert to the leasing standard, privately held companies must develop new controls and spreadsheets, as well as evaluate buying software and hiring consultants, Illuzzi said.
“This is a big private-company issue,” she said. “They’re just not ready to adopt these standards.”
Under the new leasing standard, virtually all lease agreements must be recorded as liabilities and assets on the balance sheet. Previously, FASB recognized two categories of leases — operating and financial — and only financial leases had to be included in the balance sheet.
For banks,
Second, and more importantly, the lease-related liabilities expected to flow onto the balance sheets of borrowers are likely to influence leverage and debt-to-equity ratios, potentially triggering the need to renegotiate covenants.
“It’s hard to say how that plays out,” Illuzi said. “It depends on banks and what they’re willing to accept. We don’t have a clear picture yet.”
Implementation of the revenue recognition standard began in January 2018, followed a year later by lease accounting. CECL is set to take effect for public companies in January — provided Congress doesn’t intervene.
For months, the American Bankers Association has been pushing for a delay for CECL.
James Ballentine, the association's executive director of congressional and political affairs, sent a letter on Wednesday to Rep. Gregory Meeks, D-N.Y., the chairman of the House’s consumer protection and financial affairs subcommittee, reiterating the ABA's call for a yearlong delay to conduct a quantitative impact study. The ABA insists that CECL will be countercyclical, driving up loan-loss reserves and reducing the availability of credit during downturns.
“Accounting that overstates loss reserves during an economic downturn will aggravate the procyclicality and that is what we believe CECL will do,” Ballentine wrote.
A week earlier, a bipartisan group of lawmakers led by Reps. Vincente Gonzalez, D-Texas, and Roger Williams, R-Texas, wrote to Securities and Exchange Commission Chairman Jay Clayton, expressing similar concerns.
“In the next severe downturn, CECL will hurt banks, but it will hurt borrowers and the economy at least as much and probably worse,” Gonzalez and Williams wrote.
According to Rep. Blaine Luetkemeyer, R-Mo., who signed the letter to Clayton, lawmakers are preparing legislation to delay CECL implementation.
“My solution is to solution is to stop implementation and have FASB study this,” Luetkemeyer said earlier this month at a conference in Washington organized by Deloitte.
“We have a bill that we’re trying to put together right now … which would cause a delay and then ask for a study,” Luetkemeyer added. “I know in the Senate they’re looking at the same thing. ... Whenever both sides of the building are working on something there’s a good chance something gets done.”
While signaling a willingness to consider changes to the leasing standard's implementation schedule, FASB is pushing back against calls to delay CECL. At the Deloitte conference, board member Hal Schroeder said the standard would lead to a stronger economy.
“I strongly believe CECL achieves the FASB’s mission,” Schroeder said. “That is to provide investors and other users with better decision-useful information. In turn, better information should contribute to improved pricing and capital allocation decisions. And, by extension, a safer financial system and a more resilient economy.”
