Time for Congress to put an end to CECL

The Financial Accounting Standards Board is considered by people who actually do business to be ridiculously out of touch.

Sadly, FASB has proved this again. The FASB seems to spend its time deriving increasingly more fiendish and complex accounting standards. These new rules place an even heavier burden on the private sector, with little regard for cost versus benefit or practicality for a typical company. Neither does it recognize relevance to banks and investors who use the financial statements.

The FASB standards best suit the largest corporations: those that have large accounting staffs and can afford to pay a myriad of consultants and modelers to cope with the latest pronouncements. The recent FASB-induced fiasco is the imposition of its so-called Current Expected Credit Losses accounting standard, with a first quarter 2020 implementation that comes at the worst possible time.

The CECL standard requires U.S. companies to pretend to employ prophets as it mandates that banks predict and set aside reserves at the closing of loans for potential losses throughout the life of the loan.

In the absence of certifiable prophets, firms must hire modelers to make predictions over extremely long-term periods. These models are typically very precise and broadly inaccurate. And the models do not relate to the changing real world, especially what is confronting businesses and the economy now — a massive recession induced by COVID-19.

According to the FASB, these models have to be constantly tinkered with over time and will presently force banks to significantly reduce their capital. With CECL, capital is reduced in bad times and increased in good times.

It is exactly the type of pro-cyclical accounting that any country should avoid for its own good.

Contrary to the objective of all the stimulus efforts being put forth by the U.S. government and the private sector, the CECL standard will likely reduce loans which could have otherwise been made during this crisis.

The CECL is built in a way in which the effects will continue to reduce lending by decreasing capital in accelerating amounts as loan loss reserves are added. Therefore, the deeper the COVID-19 recession gets, the less capital CECL will make available for lending.

Even with this clear and present crisis, FASB is moving full steam ahead with its implementation.

There are bills in Congress designed to delay or abolish CECL. But the fact that the FASB has not taken one step to at least delay CECL is astonishing.

One wonders if the FASB is so socially distanced from the real world that they think they are living on another planet, and are merely clinically curious about the crisis happening to everyone else. In fact, it is the FASB’s own actions, or inaction in this case, which will make the crisis worse.

Furthering the problem, the CECL standard could become more difficult to compare results across U.S. banks and financial institutions; or at least between the U.S. and the rest of the world.

The multitude of employed reserve methodologies make comparison almost impossible. The FASB, undeterred by any of this, seems so convinced by its own brilliance that it has ignored the groundswell of many comments from practitioners and investors who’ve overtly pointed out the obvious issues in creating such a model-intensive component of financial statements.

Congress must take action to help rebuild the economy without spending even one dollar of taxpayer funds: abolish CECL.