SIFMA calls to slow CECL credit-losses project

Dive Brief:

The Securities Industry and Financial Markets Association — a powerful trade group that represents broker-dealers, investment banks and asset managers — is asking the Financial Accounting Standards Board to extend the public comment period on a proposed change of how companies report credit losses, according a letter sent by SIFMA Deputy General Counsel Kevin Zambrowicz.
The letter dated July 7 notes that the public comment period, which opened June 27 and ends Aug. 28, coincides with a quarter-end financial reporting period and that most of SIFMA's members won’t be able to begin focusing on it until “halfway through or near the end of what is an already fairly brief comment period for a proposal of such complexity.”
The proposal “is potentially very significant to SIFMA member firms. An extended comment period would provide more time for the industry to formulate a more comprehensive response,” Zambrowicz wrote in the letter addressed to Hillary Salo, FASB’s technical director, which is posted on the project’s public comment page on the accounting standard’s setter’s website.

Dive Insight:

The current expected credit losses standard, known as CECL, grew out of a FASB effort to foster timelier reporting of losses after the 2008 financial crisis prompted concerns about delays in recognizing deteriorated asset values.

Asked whether the FASB would consider extending the public comment period, a spokesperson in an emailed statement wrote that the board would “consider all feedback received from comment letters as part of its deliberation process.” To date, the letter is the sole response posted on the FASB’s comment page for the project.

The standard has been a lightning rod for controversy in recent years, especially from the banking sector.

The FASB’s CECL standard that went into effect for the country’s largest banks in mid-December 2019 was viewed by some critics as onerous, as it required banks to set aside reserves for their entire book of loans based on estimated losses for the full life of those loans, CFO Dive previously reported. Previously, banks set aside their reserves on an incurred-loss basis and the reserves were only for loans showing signs of trouble.

The proposed change is aimed at addressing complaints that the accounting rules actually make banks report more losses when they buy performing loans versus loans that show signs of deteriorated credit quality, CFO Dive previously reported.

Under current generally accepted accounting principles, there are effectively two models for reporting such assets, depending on whether the assets are deemed healthy or deteriorated. With the new proposal, there would be one “gross up” accounting model used under which there would be no credit loss recorded on acquisition, according to the FASB, which is inviting comments on the plan through August 28.