With the recent legislative action taken in response to COVID-19 many institutions are unclear on how these changes will impact CECL. First and foremost, there have been no changes to the adoption dates or any other aspect of the CECL standard due to COVID-19. However, Congress, Regulators, and FASB are taking some actions to help.
Congress decided to add Section 4014, “OPTIONAL TEMPORARY RELIEF FROM CURRENT EXPECTED CREDIT LOSSES” to the CARES Act.
Section 4014 specifically provides relief for all federal banking agencies, insured depository institutions and credit unions regulated by the NCUA. The temporary relief allows covered entities or any affiliate thereof to not be required to comply with the Financial Accounting Standards Board Accounting Standards Update No. 2016-13 (CECL) until the earlier of the date on which the national emergency concerning the novel coronavirus disease (COVID-19) outbreak declared by the President on March 13, 2020 under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates; or December 31, 2020. As stated, this is optional, and each entity can decide whether or not to comply. The use of a designated end date in conjunction with a conditional and unforeseeable event is exceedingly problematic. Since it was written as the earlier of two events, and one event could happen at any time, it will be virtually impossible for institutions to accurately plan for the future. We believe most public companies will not take advantage of the temporary relief. Those who chose to take advantage of the relief provided with the expectation of reaching the December 31, 2020 date may be faced with challenges if the relief is lifted prior to that date. We caution all public companies that take advantage of the relief to be proactive and have a plan in place in the event that the relief is lifted, and they must adopt CECL sooner than anticipated.
In addition, the banking regulators also issued capital standards relief. The relief provides banks with an option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period. In effect, all adjustments for CECL will be delayed for two years and then transitioned through capital over three years. This primarily affects approximately 300 public banks that adopted CECL in the first quarter of 2020.
FASB Interest Income Recognition
First, FASB has not addressed any extension of the CECL standard for public and private companies. However, FASB is addressing questions received pertaining to how to handle lending issues caused by the crisis.
An institution is providing assistance to borrowers impacted by COVID-19. The institution in the example provided a “loan payment holiday” allowing borrowers to temporarily stop payments. In this example, no payments are made over the extension period. FASB staff addressed several issues that need to be considered with the payment holiday.
Based on the fact pattern presented, interest would not accrue while the loan payment holiday is in effect. FASB staff concluded, the loan modification in the fact pattern did not represent a troubled debt restructuring in accordance with Subtopic 310-40, Receivables—Troubled Debt Restructuring by Creditors. Additionally, in accordance with Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs, the modification would be accounted for as the continuation of the original lending arrangement; that is, not as a new lending arrangement
The staff commented on how to handle interest income for this example of a payment holiday and no interest in accrued or paid.
Accounting Option 1 – Interest Recognized – upon modification, a new effective interest rate is calculated by equating the revised remaining cash flows to the carrying amount of the original debt. This new rate is applied, and interest is accrued over the payment holiday.
Accounting Option 2 – No interest income recognized during the holiday – upon modification, the institution should recognize interest income on the loan in accordance with the contractual terms. Under this option, the institution would recognize no interest income during the payment holiday and would resume recognizing interest income when the payment holiday ends.
Option 1 would have a minor effect on the interest income of the institution during the payment holiday and option 2 could have a more significant impact based on the number of extensions.
We recognize that the challenges institutions are facing today are much different than the ones they were facing a few weeks ago. We are here to work through these challenges, whether that be stress testing your loan portfolio, or analyzing any recent analytics or market studies. ARCSys offers a dynamic Incurred Loss Model and CECL Model package that help you make informed business decisions during this critical time.
Do not hesitate to reach out to us should you need any more information or have any questions for the ARCSys team.
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.