BerryDunn has issued a comment letter on FASB’s proposal to update the accounting rules for the allowance for loan losses (ALL). Overall, BerryDunn stands in support of the proposal, provided certain clarifications are made.
Background
After its May 2010 proposal on accounting for financial instruments was roundly criticized; FASB went back to the drawing board. In its December 20, 2012 revised proposal, FASB parted company with the International Accounting Standards Board (IASB) initiative that would harmonize U.S. and international standards via use of a complex “three-bucket” approach, and issued a much more straightforward proposal. You may read FASB’s proposal here: Financial Instruments-Credit Losses (Subtopic 825-15)
Notable changes in this proposal
The proposal abandons the current “incurred loss” model, under which financial institutions can only establish an allowance for loan losses based on losses that have been incurred as of the balance sheet date, in favor of an “expected loss” model. Under this approach, an institution would establish an ALL for all credit losses expected to be incurred on loans held at the balance sheet date. Thus, in addition to historical and current factors, reasonable and supportable forecasts about future events would be factored into the analysis.
Our feedback to FASB
In most respects, we are in support of the proposed ASU.
We are in agreement with:
- FASB’s proposal that credit impairment estimates be determined using an expected loss model and that such a model should incorporate future expectations using expected cash flows.
- The proposed amendments to accounting for purchased credit impaired financial assets, as this will enhance the comparability of bank financial statements
- The proposed treatment of nonaccrual loans and interest income recognition on such loans, which we believe is generally consistent with current practice.
We offer a few notes of caution:
- Our primary concern is that FASB clarify the expectations related to “reasonable and supportable forecasts that affect the expected collectability of the financial assets’ remaining contractual cash flows.” We recommend that FASB include guidance in the final ASU that this provision is not intended to require institutions to develop detailed modeling of economic conditions.
- We encourage FASB to limit disclosure requirements to those that meet the objective of providing users of the financial statements with information on how management manages the credit risk of an institution. We caution against adding significant implementation costs (especially for smaller, nonpublic companies) that might outweigh the benefit to financial statement users.
For our full comment letter to FASB, please click on the image below.
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