April 3, 2019
The Financial Accounting Standards Board (FASB) issued a new accounting standard, Accounting Standards Update (ASU) No. 2016-13, Topic 326, Financial Instruments – Credit Losses, on June 16, 2016.1 The new accounting standard introduces the current expected credit losses methodology (CECL) for estimating allowances for credit losses.
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) (hereafter, the agencies) issued a Joint Statement on June 17, 2016, summarizing key elements of the new accounting standard and providing initial supervisory views with respect to measurement methods, use of vendors, portfolio segmentation, data needs, qualitative adjustments, and allowance processes.
The agencies have developed these frequently asked questions (FAQ) to assist institutions and examiners. The focus of the FAQs is on the application of CECL and related supervisory expectations. Each question identifies the date the FAQ was originally published as well as the date(s) it was updated, if applicable.2 The agencies have also made minor technical and editorial changes to previously published FAQs. In addition, the Appendix includes links to relevant resources that are available to institutions to assist with the implementation of CECL.
In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments–Credit Losses, to mitigate transition complexity by amending the effective date of the new accounting standard for nonpublic business entities (non-PBEs)3 to fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Accordingly, responses to questions When does the new accounting standard take effect?4, "For an institution with a calendar fiscal year that is not a PBE and has not elected early adoption, how and when should the new credit losses standard be incorporated into the institution's Call Report?, and "Can you provide a numerical example illustrating the response to the previous question (i.e., for an institution with a calendar year fiscal year that is not a PBE, how and when should the new credit losses standard be incorporated into its Call Reports)" have been updated to reflect the new effective date for non-PBEs.
The new accounting standard applies to all banks, savings associations, credit unions, and financial institution holding companies (hereafter, institutions), regardless of size, that file regulatory reports for which the reporting requirements conform to U.S. generally accepted accounting principles (GAAP).
Further, ASU 2016-13 applies to all financial instruments carried at amortized cost (including loans held for investment (HFI) and held-to-maturity (HTM) debt securities, as well as trade receivables, reinsurance recoverables, and receivables that relate to repurchase agreements and securities lending agreements), a lessor’s net investments in leases, and off-balance-sheet credit exposures not accounted for as insurance or as derivatives, including loan commitments, standby letters of credit, and financial guarantees. The new accounting standard does not apply to trading assets, loans held for sale, financial assets for which the fair value option has been elected, or loans and receivables between entities under common control. While there are differences between CECL and current U.S. GAAP, the agencies expect the new accounting standard will be scalable to institutions of all sizes. However, inputs to allowance estimation methods will need to change to properly implement CECL.
The new accounting standard also makes targeted improvements to the accounting for credit losses on available-for-sale (AFS) debt securities, including lending arrangements that meet the definition of debt securities under U.S. GAAP and are classified as AFS.
Until the new accounting standard becomes effective, institutions must continue to follow current U.S. GAAP on impairment and the allowance for loan and lease losses (ALLL). Each institution also should continue to refer to the agencies’ December 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses, and the policy statements on allowance methodologies and documentation4 (collectively, the ALLL policy statements) until the effective date of ASU 2016-13 applicable to the institution.5 The agencies will not rescind existing supervisory guidance on the ALLL until CECL becomes effective for all institutions.
The agencies plan to issue proposed supervisory guidance on the allowance for credit losses under CECL before the first mandatory effective date for the new accounting standard. As noted in the response to question "Are there concepts, processes, or practices detailed in existing supervisory guidance on the ALLL that will continue to remain relevant under CECL?," many of the concepts, processes, and practices detailed in existing supervisory guidance will continue to be relevant under CECL. Until new guidance is issued, institutions should consider the relevant sections of existing ALLL policy statements, the 2016 Joint Statement, and these FAQs in their implementation of the new accounting standard.
The agencies will continue to assess whether other existing supervisory guidance requires updating as a result of the new accounting standard. In general, references in other existing supervisory guidance to the calculation, measurement, or reporting of the ALLL or the provision for loan and lease losses in accordance with U.S. GAAP will remain applicable. However, these references should be interpreted as meaning the allowance or provision for credit losses on loans and leases as measured under CECL following an institution’s adoption of the new accounting standard. Additionally, related references to or discussion of the incurred loss model within existing supervisory guidance would no longer be applicable. Institutions should consider whether internal policies, including those referencing existing supervisory guidance, need to be updated or modified for the new accounting standard.
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