Despite continued questions as to its value, banks are gearing up for a major shift in accounting rules
E CL i s c om i ng! CE CL i s coming! Will communit y banks be ready on time? The short answer: Yes. But smaller banks are divided on whether or not the time-consuming transition to the new accounting standard will provide useful information for all the work needed to prepare and comply. The new accounting standard for “current expected credit losses,” or CECL, was adopted by the Financial Accounting Standards Board (FASB) in June 2016. The new r u le s a re intended to address concerns raised by a wide range of stakeholders following the 2008 financial crisis. The effective date for CECL implementation is 2020 for SEC-registered banks and 2021 for others. Under CECL, financial institutions will be required to include reasonable and supportable forecasts in a forward-looking credit loss estimate, rather than relying on past events and current conditions. Prior to CECL, banks could only report losses when they occurred. CECL will entail crossfunctional changes to the end-to-end reserving process for financial assets measured at amortized cost.
CATCHING CECL train Ba nkers inter v iewed by Banking Exchange are confident they can meet the implementation deadline, but they disagree about whether or not the new standard will improve risk management or loan forecasting. Views differ among bankers and their industr y associations concerning the impact CECL will have on institutions. James Kendrick, first vice-president of accounting and capital policy at the Independent Community Bankers Association (ICBA), says CECL’s impact on communit y bank s w ill be minimal. “Community banks are using a for ward-looking approach now because the regulators require it,” he says. “The successful transition to the new standard is not an issue at this
point because they can use existing processes. If they are using narratives or existing spreadsheets, they can continue doing that.” Mark Zmiewski, director of enterprise risk and product management at the Risk Management Association (RMA) agrees. “Practices and policies are already in place to produce and govern the ALLL,” he says, referring to Allowance for Loan and Lease Losses. “The underpinnings—or inputs—are changing, which will require a different way of thinking about estimating losses. For example, the starting point for recognition is moving up, but the fundamental concept of reasonably predicting the future state of the portfolio is very similar.” In terms of banks’ readiness to implement CECL , Zmiewsk i says there are several pre-adoption stages: awareness, preparation, and implementation. “Most banks are aware and many are scoping out the resources they will need,” he says. “Implementation is still a ways off, especially since it does not go into effect until year-end 2019 for early adoption. We expect that preparation will pick up considerable speed in 2017.” Banking associations are helping members prepare. RMA developed a Community Bank CECL Service to capture, store, and report on loan loss information. It provides a framework for data that can be leveraged for use with the ALLL, risk ratings, concentrations, and limits, and provides insight into deal structures. The American Bankers Association and ICBA offer webinars, videos, and workshops. A future ICBA webinar will focus on regulator implementation and scrutiny. Mike Gullette, ABA vice-president of accounting and financial management, says most community banks are in the early planning stages, if they have started. “Right now, we’re trying to get them to focus on what kind of data they need to start collecting.” It is rare for any bank to track and
December 2016/January 2017