The FASB’s tentative decisions on changes to CECL

The Financial Accounting Standards Board (FASB) has issued tentative decisions after reviewing the current expected credit loss (CECL) accounting standard. These decisions are intended to provide clarity for banks and credit unions that have adopted or have yet to adopt CECL. With requirements for troubled debt restructuring (TDR) identification now reestablished and new FASB guidance related to CECL pending, banks and credit unions must carefully consider the implications of these changes and assess their impact. Here’s what you need to know.

Tentative decisions to improve and clarify CECL

The FASB has been performing a post-implementation review of the CECL accounting standard and issued tentative decisions in February 2022 to improve and clarify the standard. These decisions include:

1. Requiring disclosure of gross charge offs with the vintage disclosures.
2. Removing the recognition and measurement criteria for TDRs while also requiring enhanced disclosures for entities that have adopted CECL. A final Accounting Standard Update (ASU) will be drafted to formalize these changes.
3. Eliminating the distinction between purchased credit deteriorated (PCD) and non-PCD assets and requiring all acquired assets to follow the PCD accounting model, with certain exceptions; additional research and outreach to be performed prior to drafting an ASU.
4. Concluding not to defer the effective date of CECL for nonpublic entities.

Our take

While the FASB didn’t provide additional adoption relief to those yet to adopt, we see the direction of changes made as movement in that direction. Here are some key takeaways to consider:

1. The FASB decided to require only gross charge offs in vintage disclosures. The original CECL standard was unclear about the presentation of gross charge offs and gross recoveries in the vintage disclosures. The FASB’s original example of a vintage disclosure included disclosures of both gross charge offs and gross recoveries by vintage period; however, this wasn’t consistent with guidance provided in the text. With the FASB’s decision to require only gross charge offs, adopters won’t have to track recoveries to vintage period — thus avoiding a significant administrative and operational burden.
2. Entities that have already adopted CECL must carefully review the enhanced disclosure requirements. While the removal of the recognition and measurement criteria for TDRs eliminates separate consideration of TDRs post-adoption, the enhanced disclosure requirements are more expansive and will require consistent assessment of a borrower’s financial difficulty with greater emphasis on the assessment of the “new” loan criteria within ASC 310. As a reminder, the CARES Act and Consolidated Appropriations Act, 2021 (CAA) TDR provisions expired on Jan. 1, 2022, and institutions should ensure procedures and controls to identify and account for TDRs have been reinstituted.
3. There are potential revisions to accounting for acquired assets. The FASB is addressing concerns presented by stakeholders on non-PCD loans, as the accounting treatment under CECL effectively caused a “double counting” of credit losses and inflated the yield on assets through accretion of credit marks. The potential shift away from the separating PCD loans from other loans would simplify the accounting for acquired financial assets.
4. FASB will not defer the effective date of CECL for institutions yet to adopt. The Board’s decision isn’t a surprise at this point. We encourage entities to establish a timeline for adoption and not delay in their preparation.

Summary

The CECL standard was issued nearly six years ago and has been adopted by only a small percentage of the roughly 10,000 banks and credit unions. Overall, the changes resulting from this post-implementation review continue to address concerns from stakeholders, impacting both those that have adopted and have yet to adopt. However, with new FASB guidance pending and CARES Act and CAA TDR provisions now expired, institutions should carefully review these developments and understand their implications. If you have questions about the current or pending rules or CECL adoption in general, give us a call — we’re ready to help.