The Financial Accounting Standards Board (FASB) hosted a virtual roundtable on implementation of the current expected credit losses (CECL) standard and related technical issues. The CECL roundtable is part of the FASB’s ongoing post-implementation review (PIR) of the standard, the “quality control” phase of the standard-setting process to ensure that accounting standards are working as intended.
During the listening session, a broad group of investors, preparers, practitioners and prudential regulators provided feedback on CECL implementation, including technical issues related to purchased financial assets with credit deterioration and troubled debt restructurings.
Below are some discussion highlights:
CECL Implementation in 2020
Roundtable participants shared perspectives on how CECL performed for large public institutions amid the COVID-19 crisis. Some investors and preparers expressed concerns about CECL’s effect on income statement volatility, while others attributed that volatility to pandemic-related economic uncertainties and multiple rounds of government stimulus. Some participants cited a lack of comparability in CECL disclosures, while others expressed the belief that CECL’s flexibility in what to disclose is appropriate because different banks have different needs/clients.
Purchased Financial Assets with Credit Deterioration (PCD)
The discussion focused on the observations of applying PCD accounting during the initial year of CECL adoption as well as discussing various potential alternatives that would modify the PCD guidance with regards to scope and presentation. Participants shared alternatives that could alleviate their concerns with the current PCD accounting guidance including eliminating the need to recognize a provision expense when acquired financial assets do not qualify for PCD accounting (referred to during the discussion as the “double count”). However, certain participants acknowledged that although the alternatives discussed could be beneficial in certain aspects, there could be potential consequences of making a change to the current PCD guidance including operational and transparency concerns.
Troubled Debt Restructurings (TDRs)
Participants debated the relevance of TDRs as a measure of troubled loans. Some noted that these measurements are less relevant for banks given the forward-looking nature of the CECL model and that relevant information would be better conveyed through disclosures. Others noted that TDRs are a valuable measure, but that the “once a troubled loan, always a troubled loan” designation was a problem, especially as banks attempt to work with borrowers to modify those loans.
When the event concluded, roundtable moderator and FASB Technical Director Hillary H. Salo thanked participants for their input, which she described as “a really critical part of our process.”
Salo noted that the FASB staff is “[Planning] to digest all of the feedback we heard today and come back to the Board in the near future to discuss whether the Board wants to add a project or projects to the technical agenda based on what we heard. In addition, we are going to continue to keep you up to date on our PIR activities and the outreach that we complete as we go through our PIR process.”
FASB Chair Richard R. Jones also thanked roundtable participants, noting that the roundtable is not a “one and done,” and that stakeholders should continue to reach out to the FASB with additional input or any new developments.
A recording of the three-hour roundtable can be found on the “Past Meetings” page of the FASB website and is available for 90 days.