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Last week (on Nov. 11), the Financial Standards Accounting Board (FASB) voted to finalize the effective date of its proposed regulations on measuring loan-loss reserves. The sweeping regulations will require a forward-looking “expected loss” (CECL) approach instead of the “incurred loss” approach effective today. The board tentatively decided the effective dates as:
The board also permitted early adoption of the guidance. Although, FASB is still making modifications to the guidance which is expected to be released during the first quarter of 2016, the confirmation of effective dates underscores FASB’s direction in moving forward with the proposed CECL guidelines.
Accounting for Troubled Debt restructuring (TDRs) and the model for Available For Sales (AFS) securities were two of the “fatal-flow” matters discussed during this meeting. The board reversed its previous decision of including a cost-basis adjustment to the modified asset based on the feedback received. As a result, credit losses for TDRs would be measured using the expected credit loss models only. However, as the decision is tentative, we expect further re-deliberations for TDR accounting as the pooling of TDRs is still not allowed.
Though the board decided to apply a fair value floor for AFS securities into the credit loss model, it decided to retain the clause which would require entities to decide whether they are required to sell the security before recovery of its amortized cost basis. While these were the two sweep issues discussed during the meeting, other external review comments would be dealt with either directly in the final guidance or in a separate meeting.
We believe the biggest takeaway from the Nov. 11 meeting is a confirmation of FASB’s direction in terms of CECL, by putting the effective dates of adoption in place. Although, smaller banks would have a 3 year time frame to implement the expected changes in calculations, the prep work needs to start as early as possible. Below are a few reasons that substantiate our thinking:
Our deep-dive webinars on FASB’s Nov. 11 meeting and the upcoming Nov. 23 meeting, will explore the nuances of CECL regulations and outline a roadmap to a successful transition.
With a good amount of research and cost to be put into the expected guidelines, banks should think big and try solving other risk and analytics issues using the same spend. Start early to not just comply, but also to reap the benefits of the sweeping changes.