FASB’s Golden gives spirited defense of impairment project

Citing “a cascade of misinformation about the impairment standard,” FASB Chairman Russell Golden provided a spirited defense Thursday of the board’s project on financial reporting guidance for loan-loss reserves.

FASB’s standard on impairment of financial instruments is scheduled to be issued in the first quarter of 2016. The proposal includes a “current expected credit loss” (CECL) model for loan reserves that would replace the existing “incurred-loss” approach, which has been cited as contributing to the recent financial crisis.

Some in the banking community have expressed concern about the proposal, saying it will require installation of costly new systems and will restrict the flow of loans from all banks by keeping more capital in loan-loss reserves.

Almost 5,000 bankers have signed an online petition circulated by the Independent Community Bankers of America urging FASB to withdraw the proposal. An American Bankers Association letter to FASB in May 2013 predicted “deep challenges … for both bankers and investors for operationalizing and applying the CECL model.”

Golden sought to ease some of those concerns Thursday at the AICPA Conference on Current SEC and PCAOB Developments in Washington.

“A lot of their concerns right now come directly from the original exposure draft,” Golden told reporters after his speech. “And we have made a lot of changes from that exposure draft as a direct result of input we’ve gotten from community banks.”

During his speech, he discussed some of the concerns. He said:

• The standard will not require businesses to develop and install costly, complex new systems. “In the underwriting process, most banks—including small community banks—already make some kind of assessment of lifetime losses,” Golden said. “I would find it very surprising to learn that any lending institution is not already making some type of assessment.”
• Bank examiners will be educated about the new standard. Golden said the standard will be consistent with comments he cited from a speech last year by Federal Reserve Chair Janet Yellen in which she said the Fed “expect[s] that a final standard will permit loss-estimation techniques that build upon current credit-risk management techniques used by community banks.”
• The standard’s view of the economics of loan financing is realistic. “The FASB simply wants banks to reflect the true economics of their loans,” Golden said. “We know—and they know—there are losses associated with the loans. We’re just trying to get them recognized today before the bank goes away tomorrow.”

Golden said the credit crisis of 2008 underscored the need for a model that is more forward-looking and gives preparers the opportunity to recognize upfront losses that exist in the loan portfolio. He also disputed the notion that only large banks were involved in the credit crisis.

From 2007 to 2009, he said, nearly all of the 168 banks the FDIC closed were small, community banks.

“Based on these statistics,” he said, “the FASB felt it was important that all lending institutions be included in the new guidance.”

—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.