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Impacts of credit loss accounting rules on private banks, others expected to unfold this year

Financial reports this year will show the impacts of new credit loss accounting rules on privately held banks and other companies, revealing how the changes fared amid economic uncertainty, lenders told US accounting rulemakers.

The accounting standard is “designed to be countercylical, which means when times change there’s an effect,” Robert Messer, chief financial officer-chief risk officer at American National Bank of Texas, said. “Now we’re in another little bit of an uncertain period and while the numbers won’t be as widely published I’m anxious to see how my privately held community banks and larger brethren deal with this possible uncertainty that we’re looking at over the next year – soft landing versus a recession,” he said. “So the ‘reasonable supportable forecast’ I think they’re going to be interesting, not widely shared but I think we’re going to find out if this really works.”

He was talking about Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which took effect in 2020 for public companies and in 2023 for privately held companies, including nonfinancial institutions. Known by its acronym CECL, the standard introduced a current expected credit losses model to require a more timely reporting of losses from loans that customers aren’t able to repay or are in risk of default. The rules are a substantial change from the prior incurred loss model whereby too little losses were deemed to be reported too late.

Accountants said that a benefit of the standard is that it enables a company to get a better sense of things like receivables and historical write-offs and where to improve their process. Notable is the level of documentation in terms of the reasonable and supportable forecasts the rules require, including the judgments used versus what the figures turn out to be.

“It will be interesting to see once we get to April,” Douglas Uhl, principal team leader, corporate accounting policy at Chick-fil-A, Inc., said. “Private companies are starting to get through that first audit under the new standard, to get some of the feedback on what it looks like and what we’re hearing I think will be interesting.”

The discussion was part of a meeting of the Private Company Council (PCC) and the FASB in mid-December 2023. The PCC is a 12-member body that works with the rulemaking board to amend US Generally Accepted Accounting Principles (GAAP) for privately held companies.

Many private companies are lagging in adoption efforts

So far, many privately held companies have not adopted CECL, viewing the standard as having little impact, PCC members also said.

“Many have not focused on a lot of attention as of yet, primarily because no one thinks it’s going to have a real significant impact,” Candace Wright, a partner in EisnerAmper’s Audit & Assurance Services Group, said. “It’s what they thought about revenue too and maybe there wasn't but there was a lot of work that ended up needing to be done, so we’ll see.”

The CECL standard is currently under the FASB’s post-implementation review (PIR), a process to determine whether new accounting rules worked as expected. As was done with leases and revenue recognition standards, there is the potential for a practical expedient to be carved out for privately held companies this year, according to the PCC’s discussions.

“One of the things we talked about at the end of the closed session was there’s going to be data that comes out about CECL adoption in the second quarter and that’s gathered over the summer,” incoming PCC Chair Jere Shawver said. “Maybe we need to be thinking about ‘are there opportunities to adjust some of those things as it relates to private companies?’ and so we would potentially look for those to be agenda items as we go into the third or fourth quarters of 2024.”

For in-depth analysis of the FASB’s guidance for credit losses, please see Catalyst: US GAAP—Financial Instruments-Impairment, also on Checkpoint.

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