June 6 - CSBS has submitted a comment letter to the Financial Accounting Standards Board in response to a proposed accounting standards update titled Financial Instruments – Credit Losses.
In the letter, CSBS acknowledged that an impairment framework which allows institutions to build stronger reserves by considering more forward-looking information would benefit the banking system.
However, CSBS would not support the framework if it is ultimately model-driven and requires unworkable forecasting projections. Further, CSBS believes FASB should thoroughly weigh the impact the proposed standards might have on community banks from a burden and complexity perspective. In a rapidly changing regulatory environment, it is critical that the benefits of any changes to the impairment accounting framework outweigh the costs. Therefore, FASB should proceed with caution in implementation and work with banking regulators to develop helpful tools to facilitate transition for smaller financial institutions.
“While acknowledging lessons learned from the financial crisis, FASB should also be aware that any change of this magnitude and importance will incur transitional costs for banks,” wrote John W. Ryan, CSBS president and CEO in the comment letter. “FASB should be mindful of the notion that many institutions did not struggle with the prevailing impairment methodology. We should not strive for a framework that introduces radical change. Rather, we should seek a framework that entails practical improvements over existing methods.”
The CSBS comment letter is available here.
FASB’s Proposed Accounting Standards Update would move away from the prevailing incurred loss model of impairment accounting by introducing a Current Expected Credit Loss model, which considers more forward-looking information than is permitted under current Generally Accepted Accounting Principles.
Financial institutions would recognize, at the balance sheet date, an allowance for expected credit losses, defined as “an estimate of all contractual cash flows not expected to be collected from a recognized financial asset or commitment to extend credit.” Information to be used includes information about past events, including historical loss experience with similar assets, current conditions, and reasonable and supportable forecasts and their implications for expected credit losses. The CECL model would replace the multiple impairment models that currently exist for debt instruments, including loans, leases, and debt securities.