Revenue
recognition and lease accounting standards have had a big impact on financialinstitutions. But new standards on reporting expected credit losses may
be even more significant for banks.
“This
is much more related to a bank’s core business,” said Reza Van Roosmalen, a
KPMG LLP managing director. “It’s the biggest accounting change I think that
banks have been subject to in a long time.”
FASB’s
expected credit loss standard, which was issued in June, changes the reporting
requirements from an incurred-loss to an expected-loss approach and addresses
concerns about financial instruments accounting
resulting from the financial crisis that began in 2007.
The
International Accounting Standards Board also moved from incurred-loss to
expected-loss accounting with the issuance of IFRS 9, Financial Instruments, in
2014, although its impairment model differs from FASB’s current expected credit
loss (CECL) approach.
The
FASB standard was intended to align accounting with the economics of lending by
requiring the immediate recording of the full amount of credit losses that are
expected. As a result, experts say the credit risk group and the accounting
group will need to work closely together to comply with the standard.
“There’s
going to be a need for education from accounting to the rest of the business
partners,” said Jonathan Prejean, a Deloitte & Touche LLP managing
director. “Obviously, the credit risk function is going to be involved, and
your forecasting and your planning, and even the lines of business and how they
write their business.”
5
considerations
Here
are five things experts say preparers may want to consider as they begin to
implement FASB’s expected credit loss standard:
The
standard is not just for banks. Financial institutions and their accounting for
their loan portfolios will be affected the most by the standard. But it also
applies to other organizations.
Lease
receivables, trade receivables, and held-to-maturity debt securities are among
the other assets organizations may hold that are within the scope of the
standard.
“This
is not just a banking standard, and it’s not just loans,” said Jonathan Howard,
a partner in the Deloitte & Touche LLP national office. “It applies to all
entities that have assets that represent the right to receive cash that they
carry at amortized cost.”
Find
the data gaps. Because the implementation date is a few years away for the FASB
standard (2020 for public companies), Prejean said, companies have time to
collect the data they need—if they don’t already have it.
The
issuance of the standard gives them the ability to move forward with an
implementation plan, and a big part of that plan will be finding gaps where
they don’t have data they will need to perform the accounting required by the
standard.
“They
can start pulling that data and making sure they have it, and make sure they’re
collecting it if they have the ability to collect it,” Prejean said. “If they
don’t, make sure they can find a way to get it, and then make sure that it’s
appropriate for financial reporting.”
This
includes making sure the appropriate controls are in place around the data.
Use
previous work. Banks may be able to take advantage of their work from previous
compliance exercises as they implement FASB’s credit loss standard.
“It’s
important for banks to think about how they could approach the standard in the
most efficient and scalable way, and look for similarities and synergies and
maybe even corroborate some of the data and modeling as far as they can with
existing models,” Van Roosmalen said.
Multinational
organizations that have been implementing IFRS 9 may use that work to their
advantage as they implement the FASB standard. Banks that have undergone
stress-testing exercises may be able to expand the scope of that work to assist
with the accounting implementation.
Remember
disclosures. Figuring out how to collaborate with the credit risk function,
evaluate your existing credit risk model, and select the appropriate risk model
for your loan portfolio will be a big part of implementation.
While
focusing on those issues is important, preparers shouldn’t lose sight of the
enhanced disclosures and the data that will be needed to fulfill the disclosure
requirements.
Don’t
delay. Gathering data may be a challenge, but Howard said getting a quick start
and figuring out what data are needed will help organizations make a smooth
transition.
“I’m
not saying everybody needs to go do a dry run today,” he said. “But you’ve got
time. So I think people need to start thinking about how they are going to
apply the standard so they can set up the processes to go about collecting that
data, capturing that data, so that might ease your transition.”
