FASB’s new credit losses standard presents new challenges for company financial reporting teams, especially in financial services.
The new standard requires a new current expected credit loss (CECL) model and is designed to enable financial reporting of credit losses that financial institutions are expecting.
A new Center for Audit Quality (CAQ) tool provides audit committees with information to consider as they perform their oversight role related to the new standard, which will have a substantial impact on accounting for companies in the financial services sector and will affect other companies as well. The CAQ is affiliated with the AICPA.
“The new standard has broad implications and will fundamentally change how companies account for credit losses,” CAQ Executive Director Julie Bell Lindsay said in a news release. “Investors are looking to understand the impact of the new standard, and our tool is designed to help audit committee members, auditors, and company management understand that impact and to plan for a timely implementation.”
The effective date for calendar year-end public companies that meet the definition of an SEC filer is Jan. 1, 2020. Calendar year-end public business entities that do not meet the definition of an SEC filer have an effective date of Jan. 1, 2021, and private companies with a calendar year end have a Jan. 1, 2022, effective date.
In their oversight role, audit committees, according to the CAQ tool, should be aware of:
- The scope of the standard.
- The methods that can be used to estimate the allowance for credit losses.
- Issues related to the company’s methodology for determining historical credit loss experience.
- How the company is using historical loss information to create reasonable and supportable forecasts.
- The permissibility of aggregating financial assets based on similar risk characteristics to evaluate financial assets on a pooled basis.
- The accounting treatment for purchased financial assets with credit deterioration.
- Timing of recording the allowance related to troubled debt restructurings.
- Permissibility of reversals of previously recognized credit losses through net income.
- Disclosures, including transition disclosures and new disclosures.
- The importance of communicating about the new standard early and often with investors.
- The effect of the standard on regulatory capital for financial institutions.
The tool also provides information for audit committees to consider as they evaluate the company’s impact assessment and evaluate the implementation plan for the standard.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.