Compliance Center: Federal Regulators Issue Joint Statement on the New CECL Accounting Standard

The National Credit Union Association (NCUA), along with other federal financial institution regulators, issued a joint statement to provide initial information about the new accounting standard, Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

The Financial Accounting Standards Board (FASB), recently issued this new accounting standard, which introduces the current expected credit losses methodology (CECL) for estimating allowances for credit losses. The new accounting standard allows a financial institution to leverage its current internal credit risk systems as a framework for estimating expected credit losses.

“This flexibility will allow smaller, less complex credit unions to use the ‘look back’ method as the primary determinant to predict future losses.”

– John Trull, NWCUA AVP of Regulatory Advocacy

The standard will be effective for credit unions for annual periods beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.

“FASB did an excellent job involving stakeholders in the rulemaking process, issuing a final rule free of surprises. FASB adopted our key recommendations including a long implementation period and flexibility in determining the methodology to predict future losses,” noted John Trull, NWCUA AVP of Regulatory Advocacy. “This flexibility eliminates the need for smaller institutions to invest in expensive predictive loss modeling software.”

Under CECL, the allowance for credit losses is a valuation account, measured as the difference between the financial assets’ amortized cost basis and the net amount expected to be collected on the financial assets (i.e., lifetime credit losses).

To estimate expected credit losses under CECL, institutions will use a broader range of data than under existing U.S. generally accepted accounting principles (GAAP). These data include information about past events, current conditions, and reasonable and supportable forecasts relevant to assessing the collectability of the cash flows of financial assets.

Single measurement approach

Impairment measurement under existing U.S. GAAP is often considered complex because it encompasses a number of impairment models for different financial assets. In contrast, the new accounting standard introduces a single measurement objective to be applied to all financial assets carried at amortized cost, including loans held for investment and held-to-maturity securities.

Scalability

While there are differences between today’s incurred loss methodology and CECL, the agencies expect the new accounting standard will be scalable to institutions of all sizes.

Similar to today’s incurred loss methodology, the new accounting standard does not prescribe the use of specific estimation methods. Rather, allowances for credit losses may be determined using various methods. Additionally, institutions may apply different estimation methods to different groups of financial assets. Thus, the new standard allows institutions to apply judgment in developing estimation methods that are appropriate and practical for their circumstances. The agencies do not expect smaller and less complex institutions will need to implement complex modeling techniques.

Purchased credit-deteriorated assets

Another change from existing U.S. GAAP involves the treatment of purchased credit-deteriorated assets. For such assets, the new accounting standard requires institutions to estimate and record an allowance for credit losses at the time of purchase, which is then added to the purchase price rather than being reported as a credit loss expense. In addition, the definition of purchased credit-deteriorated assets is broader than the definition of purchased credit-impaired assets in current accounting standards.

Accounting for available-for-sale debt securities

The new accounting standard also updates the measurement of credit losses on available-for-sale debt securities. Under this standard, institutions will record credit losses on available-for-sale debt securities through an allowance for credit losses rather than the current practice of write-downs of individual securities for other than- temporary impairment.

Retained accounting concepts

The new accounting standard does not change the existing write-off principle in U.S. GAAP or current nonaccrual practices, nor does it change the current accounting requirements for loans held for sale, which are measured at the lower of amortized cost or fair value.

  • Transition: On the effective date, institutions will apply the new accounting standard based on the characteristics of financial assets as follows:
  • Financial assets carried at amortized cost (e.g., loans held for investment and held-to maturity debt securities): A cumulative-effect adjustment will be recognized on the balance sheet as of the beginning of the first reporting period in which the new standard is effective.
  • Purchased credit-deteriorated assets: Financial assets classified as purchased credit impaired assets prior to the effective date will be classified as purchased credit deteriorated assets as of the effective date. For all purchased-credit deteriorated assets, institutions will be required to gross up the amount of the financial asset for its allowance for expected credit losses as of the effective date and should continue to recognize the noncredit discount or premium as interest income, if appropriate, based on the effective yield on such assets determined after the gross-up for the allowance.
  • Available-for-sale and held-to-maturity debt securities: Debt securities on which other-than-temporary impairment had been recognized prior to the effective date will transition to the new guidance prospectively (i.e., with no change in the amortized cost basis of these securities).

Compliance Question of the Week

Is there a regulatory problem with giving a member a debit card (instead of an ATM card) on a savings account?

A credit union is required by federal law to maintain a reserve, the amount of which is dependent on both the size of the credit union and the nature of its accounts.  Credit unions with deposits at least $15.2 million are subject to this reserve rule (Reg. D).  The reserve rule covers transaction accounts such as share draft, checking and NOW accounts, but does not cover savings deposits such as regular share and money market accounts.  It is important to focus on the savings account limitations.  If a credit union allows a member who has a savings account to exceed the limitations, that account would be treated as a transaction account and therefore subject to the reserve rule.  Furthermore, all savings accounts, and not just that member’s account, will be treated as a transaction account. 

Credit unions limit savings accounts to 6 transactions per month to avoid having to reserve on that type of account.  To ensure that a savings deposit does not exceed those limitations, a credit union must either prevent withdrawals or transfers that would exceed the limitations, or adopt procedures to monitor transfers after the fact and contact those members who exceed occasionally.  If the member persists in over withdrawals, the credit union must close the account or take away its transfer capabilities.

A member with a debit card can use it for a variety of transactions, perhaps several times a day, and easily exceed the 6 transactions a month limitation that is imposed on a savings account.  To avoid the reserve rule, a credit union may not want to give a member a debit card on a savings account.  Consider having the member open a checking account instead.

Resources

12 CFR 204.2(d)(2)

12 CFR 204

Legal Briefs

National Credit Union Administration (NCUA)

The June issue of the NCUA Report is now available. This month’s report focuses on the extended call reporting deadlines, underwriting with the new MBL rule, grants for low-income credit unions, and reaching the credit-invisible.

The NCUA published the results of its June 2016 Board Meeting. In the meeting, the NCUA Office of Examination recommended that the Board consider releasing a proposal to incorporate “S” for “sensitivity to market risk” into the current CAMEL system, the NCUA proposed a change to the applications for funding from the Community Development Revolving Loan Fund, and the NCUA approved adjustments to the civil monetary penalties.

The NCUA announced that it will be accepting comments regarding the NCUA’s efforts to modify its supervision and examination procedures through August 1st.

NCUA Chairman Metsger announced that credit unions will have the opportunity to offer comments on the NCUA’s 2017-2018 proposed budget in October, 2016.

Consumer Financial Protection Bureau (CFPB)

The CFPB published its interim final rule to make adjustments for inflation to its civil monetary penalties.

The CFPB announced the 2017 annual dollar thresholds that will apply to transactions under the CARD Act, HOEPA, and Ability-to-Repay Mortgage Rule. The updates include adjustments to the threshold for total points and fees for a qualified mortgage, the HOEPA adjusted total loan amount, and allowable credit card fees.

Federal Reserve Board (FRB)

The June edition of FedFlash is now available.

The FRB released a statement regarding the information received since the last Federal Open Market Committee meeting in April. The release states that the labor market has slowed while the growth in economic activity has picked up.

Federal Housing Finance Agency (FHFA)

The FHFA issued its 2015 Report to Congress, which reports information regarding examinations of Fannie Mae, Freddie Mac, Federal Home Loan (FHL) Banks, and the FHLBank’s Office of Finance. 

Financial Accounting Standards Board (FASB)

FASB released new guidance on accounting for credit losses. The new guidance is aimed at improving financial reporting by requiring timelier recording of credit losses on loans and other financial instruments.

Office of Foreign Assets Control (OFAC)

OFAC has updated the SDN list as of June 9, 2016. The last update prior to this was June 3, 2016.
Questions? Contact the Compliance Hotline: 1.800.546.4465,
compliance@nwcua.org.

Posted in Compliance News, Federal, NCUA.