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FASB Issues Final CECL (Current Expected Credit Loss) Rules

Mon, Jun 20, 2016

Columbia, Maryland

The Financial Accounting Standards Board (FASB) finalized new rules regarding credit losses, fundamentally changing how credit unions, banks and other financial institutions calculate their loan loss reserves.

The FASB said the Current Expected Credit Loss (CECL) rules, formally titled Accounting Standards Update No. 2016-13, require credit unions and other organizations to “measure expected credit losses using historical experience, current conditions, and reasonable and supportable forecasts.” The rules also require more disclosures regarding credit quality and underwriting standards, as well as significant estimates and judgments used in estimating losses. Some of those requirements will be optional for credit unions and other non-public business entities.

According to FASB Chair Russell Golden, “the new guidance aligns the accounting with the economics of lending by requiring banks and other lending institutions to immediately record the full amount of credit losses that are expected in their loan portfolios, providing investors with better information about those losses on a more timely basis,” According to FASB, many loss estimation techniques in use today are still allowed, but the inputs will have to change to reflect the full amount of expected credit losses. Judgment will still be a big factor in determining which loss estimation method is appropriate, it noted.

In the works since 2012, CECL has been controversial in the credit union industry. While member credit unions and CUNA disagreed with FASB’s decision to apply the new standard to credit unions, the final standard reflects input provided to the FASB board and staff by credit unions and will make compliance more manageable for credit unions.

For credit unions, the rules take effect for fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021. For public companies that file with the SEC, the rules will be effective for fiscal years beginning after Dec. 15, 2019. All entities can adopt the rules for fiscal years beginning after Dec. 15, 2018.

READ THE JOINT STATEMENT HERE from The Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC).