FASB held a roundtable meeting on May 20,2021 on CECL that encompassed three main topics.
- How the Investor, Regulator, Auditor, and Industry groups think the first year of CECL allowance accounting progressed including possible COVID effects, accounting issues and recommendations.
- Based on questions sent to the TRG, FASB requested the FASB staff to address two specific issues:
- A possible Purchase Credit Deteriorated (PCD) standard change and
- A possible Troubled Debt Restructuring (TDR) standard change
First, let’s address the elephant in the room, there was no discussion about eliminating CECL, not requiring CECL for smaller institutions, or making major changes to the CECL standard. In fact, everyone was reasonably happy with the process and the results so far.
The Investor group was fairly positive about the adoption of CECL, but in general wanted additional disclosures to better understand the calculation process.
The Regulator group was generally very positive about the CECL adoption process and was probably the group that liked the CECL allowance changes the most.
The Preparer group was generally positive about the standard and the process. They commented advantages of the flexibility that was built into the standard, however, this group would like to see some changes as discussed below.
The Auditor group was generally positive about the standard and agreed with some of the concerns raised by the Preparer group. However, this group was probably the most diverse in their responses.
As for the two major topics of the day, PCD and TDRs, the groups were clearly more distinctly different. The Regulator group clearly did no want any changes in the standard for TDR’s or PCD loans. However, they seemed to be most open to possible changes in TDR’s as long as some similar tracking was available. The other groups were more split on the two issues with some believing that the changes described below were good and others had reservations.
The Other Issues Discussed
Purchase Credit Deteriorated – The CECL standard requires that when financial assets are acquired (purchased) whether through a business combination or direct purchase, the acquirer must evaluate the assets purchased (primarily loans and HTM, AFS investments) to determine if there has been a more than an insignificant deterioration in credit from origination. Assets determined to be PCD are recorded on the acquirers’ books with an allowance and those that are no determined to be PCD are treated as originated assets. Preparers outlined several issues with the accounting, such as possible double accounting for allowances, significant effort in determining original credit risk and differences in determinations and accounting between entities. FASB staff presented a detailed analysis of the issues in question and a recommendation to treat all loans as PCD. The Regulator group was soundly against the idea as was some of the other members of the Audit and Investor group. However, the Preparer group was generally for the change.
TDR Determination – Because CECL forecasts risk using the future expected cash flows of a financial asset, which is generally the accounting for TDRs today, many of the participants in the Audit and Preparer group and some of the investor group, thought the additional effort to document and disclose TDRs was excessive and many of the new disclosures gave better information. However, the Regulator group as well as a few members of the Audit and Investor groups were generally against the change.
So, what came out of the meeting?
While there was some agreement with concerns expressed by the groups, Regulator and Investor buy-in was insufficient for the changes to be considered and voted out by FASB. The TDR change would also require significant discussions and changes. As for the PCD change, the items presented were either the same or similar to original issues deliberated before the standard was issued and were previously investigated by the TRG. We do not believe either of the changes will be enacted.
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About the Author:
Mike has been providing accounting, consulting and auditing services to financial institutions for over 30 years. Considered the “CECL Guru”, Mike was selected by the AICPA to create and deliver their 8-hour CPE course on CECL. He is a past member of the Auditing Standards Board and a published author on Accounting and Auditing for Financial Institutions. Mike has spoken at numerous AICPA conferences as well as other national and local financial institution associations. Mr. Umscheid is also the author of the 8-hour CPE course published by the AICPA for CECL.Mike is currently the President and CEO of ARCSys, a consulting firm that specializes in Allowance for Credit Loss software and CECL. He graduated from Virginia Polytechnic Institute and State University in Blacksburg, Virginia. Mike enjoys working out in the morning before work and loves to cook for his family and friends.