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FASB Finalizing New Loan-Loss Accounting Model in Early ’16

11/13/2015

CBI Urges You to Read the Summary of the FASB Proposal
The Financial Accounting Standards Board has proposed an Accounting Standards Update on credit losses that will require every community bank in the country to revise the way they account for their loan loss reserves (ALLL) and the way they account for their securities. Please read the Summary and Questions and Answers below. Also, we encourage you to send a comment letter to FASB ([email protected]) expressing your views on the proposal. A link to a sample letter is provided below. Please use this letter as a guide and customize to your bank’s specific concerns.

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FASB’s Proposed Accounting Standards Update: Financial Instruments—Credit Losses — FAQs

11/13/2015

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READ THE FULL PROPOSAL

Why is FASB proposing changes to the allowance for credit losses?
There is a general consensus that the recent financial crisis was caused and prolonged by the delayed recognition of credit losses stemming from the adoption of the incurred loss model. The lack of forward-looking information in loss estimates and the reliance on multiple credit impairment models resulted in carrying values for financial instruments that were overstated.

How does the proposal change the current provisioning method?
The current incurred loss model and the historical loss model would be replaced by an expected credit loss model that would require the bank to generate an estimate of contractual cash flows not expected to be collected. The generation of estimated cash flows would be based on reasonable and supportable forecasts. Banks would be prohibited from generating an estimate of credit losses based solely on the most likely outcome. The proposed expected credit loss model would apply to both loans and investment securities.

When is FASB expected to issue a final accounting standards update on these changes?
FASB has announced that they expect to finalize the allowance changes in the first quarter of 2014.

Does the proposal result in a day one loss for new loans recorded on the balance sheet?
Yes. When a loan is initially recognized on the balance sheet the net present value of contractual cash flows not expected to be collected would be recorded under the loan loss provision.

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FASB Finalizing New Loan-Loss Accounting Model in Early ’16

FASB’s Proposed Accounting Standards Update: Financial Instruments—Credit Losses — FAQs

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FASB Finalizing New Loan-Loss Accounting Model in Early ’16

﻿FASB’s Proposed Accounting Standards Update: Financial Instruments—Credit Losses — FAQs

Community Banking News

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FASB’s Proposed Accounting Standards Update: Financial Instruments—Credit Losses — FAQs