Small Banks Get Extra Year to Implement Credit Losses Standard

On November 15, the Financial Accounting Standards Board (FASB) published updated guidance that gives community banks and credit unions more time before they must begin to apply the credit losses standard. The amendment to U.S. Generally Accepted Accounting Principles (GAAP) will align the implementation date for nonpublic entities’ annual financial statements with the implementation date for their interim financial statements.


Credit losses standard

In June 2016, the FASB published Accounting Standards Update (ASU) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The updated standard was the FASB’s response to criticism that emerged after the 2008 financial crisis about the existing guidance for writing down bad loans and securities.

It requires businesses to look to the future to estimate the losses they expect to experience on souring loans, trade receivables and certain types of securities. The standard applies to all types of businesses, but it largely affects banks. Bankers have labeled it the biggest accounting change in decades, and many in recent months have expressed concerns about how they’ll apply its changes to their financial reporting.

The FASB intended for community banks and credit unions to have more time to begin following the standard compared to large, publicly traded banks. But the wording of the transition guidance in ASU No. 2016-13 didn’t make it clear that the extra time was available.

ASU No. 2016-13 said nonpublic business entities had to apply the new accounting requirements for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The transition guidance in the standard requires businesses to make what the board calls a “cumulative-effect adjustment” to the retained earnings as of the beginning of the first reporting period in which the new accounting becomes effective.

Banks and professional groups said the wording used for the cumulative-effect adjustment meant credit unions and community banks effectively would be adopting the standard as of January 1, 2021, which is when the FASB wants financial institutions that qualify as public business entities but don’t file financial statements with the SEC to apply the new rules. Large, publicly traded banks must adopt the standard in 2020.


Clarified implementation date

In November, the FASB issued Accounting Standards Update (ASU) No. 2018-19, Codification Improvements to Topic 326, Financial Instruments — Credit Losses. The updated guidance aligns the implementation date for nonpublic entities’ annual financial statements with the implementation date for their interim financial statements.

So, nonpublic entities must follow the credit losses standard for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. This means a 2022 effective date for smaller institutions. The guidance also clarifies that operating lease receivables aren’t subject to the credit losses standard.

“Our original objectives are being met with the change that we’ve proposed — that the aligning of the transition effective dates will reduce the cost of transition — so I continue to support that,” FASB member Christine Botosan said. “That was the board’s original intent.” The FASB expects to publish the final version of the amendment by year end.


No exception in the works

Most financial institutions, accounting firms, and professional groups that commented on the changes endorsed the FASB’s effort to clarify the effective date for smaller institutions. However, some respondents wanted the FASB to exclude credit unions and community banks from the standard altogether. At that time, the FASB refused to discuss these comments, because they were beyond the scope of the project.

“The [FASB] intentionally included all entities within the scope of the credit losses standard to provide an over-arching model for similar types of transactions,” a FASB staff member said. “Furthermore, the board was conscious of making decisions that would help operationalize the credit losses standard for community banks and credit unions.”





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