Small community banks are poised to receive a delay in the new loan loss standard from the accounting board.
The Financial Accounting Standards Board is changing how it sets the effective dates for major accounting standards, including the current expected credit loss model or CECL. They hope the delay, which gives some banks an extra one or two years, provides them with more time to access scarce external resources and learn from the implementation lessons of larger banks.
Bank Director spoke with FASB member Susan Cosper ahead of the July 27 meeting discussing the change. She shed some light on the motivations behind the change and how the board wants to help community banks implement CECL, especially with its new Q&A.
BD: Why is FASB considering a delay in some banks’ CECL effective date? Where did the issue driving the delay come from?
SC: The big issue is the effective date philosophy. Generally speaking, we’ve split [the effective dates] between [Securities and Exchange Commission] filers or public business entities, and private companies and not-for-profits. Generally, the not-for-profits and private companies have gotten an extra year, just given their resource constraints and educational cycle, among other things.
We started a dialogue after the effective date of the revenue recognition standard with our small business advisory committee and private company council about whether one year was enough. They expressed a concern that one [extra] year is difficult, because they don’t necessarily have enough time to learn from what public companies have done, they have resource constraints and they have other standards that they’re dealing with.
We started to think about whether we needed to give private companies and not-for-profits extra time. And at the same time, did we need to [expand that] to small public companies as well?
BD: What does this mean for CECL? What would change?
SC: For the credit loss standard, we had a three-tiered effective date, which is a little unusual. Changing how we set effective dates would essentially collapse that into two tiers. We will still have the SEC filers, minus the small reporting companies, with an effective date of Jan. 1, 2020.
We would take the small reporting companies and group it with the “all-other” category, and push that out until Jan. 1, 2023. It essentially gives the non-public business entities an extra year, and the small reporting companies an extra two years.
BD: How long has FASB considered changing its philosophy for effective dates? It seems sudden, but I’m sure the board was receiving an increasing amount of feedback, and identified this as a way to address much of that feedback.
SC: We’ve been thinking about this for a while. We’ve asked our advisory committees and counsels a lot of questions: “How did it go? Did you have enough time? What did you learn?” Different stakeholder groups have expressed concern about different standards, but it was really trying to get an understanding of why they needed the extra time and concerns from a resource perspective.
When you think about resources, it’s not just the internal resources. Let’s look at a community bank or credit union: Sometimes they’re using external resources as well. There are a lot of larger companies that may be using those external resources. [Smaller organizations] may not have the leverage that some of the larger organizations have to get access to those resources.
BD: For small reporting companies, their CECL effective date will move from January 2020 to January 2023. How fast do you think auditors or anyone advising these SRCs can adopt these changes for them?
SC: What we’ve learned is that the smaller companies wait longer to actually start the adoption process. There are many community banks that haven’t even begun the process of thinking about what they need to do to apply the credit loss standard.
It also affords [FASB] an opportunity to develop staff Q&As and get that information out there, and help smaller community banks and credit unions understand what they need to do and how they can leverage their existing processes.
When we’ve met with community banks and credit unions, sometimes they think they have to do something much more comprehensive than what they actually need to do. We’re planning to travel around the country and hold meetings with smaller practitioners — auditors, community banks, credit unions — to educate them on how they can leverage their existing processes to apply the standard.
BD: What kind of clarity does FASB hope to provide through its reasonable and supportable forecast Q&A that’s being missed right now? [Editor’s note: According to FASB, CECL requires banks to “consider available and relevant information, including historical experience, current conditions, and reasonable and supportable forecasts,” when calculating future lifetime losses. Banks revert to their historical loss performance when the loan duration extends beyond the forecast period.]
SC: There are so many different aspects of developing the reasonable and supportable forecast in this particular Q&A. We have heard time and time again that there are community banks that believe they need to think about econometrics that affect banks in California, when they only operate in Virginia. So, we tried to clarify: “No, you need to think about the types of qualitative factors that would impact where you are actually located.”
The Q&A tries to provide an additional layer of clarity about what the board’s intent was, to help narrow what a bank actually has to do. It also provides some information on other types of metrics that banks could use, outside of metrics like unemployment. It talks about how to do the reversion to historical information, and tries to clarify some of the misinformation that we have heard as we’ve met with banks.
BD: People have a sense about what the words “reasonable” and “supportable” mean, but maybe banks feel that they should buy a national forecast because that seems like a safe choice for a lot of community banks.
SC: Hindsight is always 20-20, but I think people get really nervous with the word “forecast.” What we try to clarify in the Q&A is that it’s really just an estimate, and what that estimate should include.
BD: Is the board concerned about the procrastination of banks? Or that at January 2022, banks might expect another delay?
SC: What we’re really hoping to accomplish is a smooth transition to the standard, and that the smaller community banks and the credit unions have the opportunity to learn from the implementation of the larger financial institutions. In our conversations with community banks, they’re thinking about it and want to understand how they can leverage their existing processes.
BD: What is FASB’s overall sense of banks’ implementation of CECL?
SC: What we have heard in meetings with the larger financial institutions is that they’re ready. We’re seeing them make public disclosure in their SEC filings about the impact of the standard. We’ve talked to them extensively about some of how they’ve accomplished implementation. After the effective date comes, we will also have conversations with them about what went well, what didn’t go well and what needs clarification, in an effort to help the smaller financial institutions with their effective date.