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NCUA, together with the Federal Reserve Board, FDIC, and OCC, issued a joint statement today on the new credit losses standard released yesterday by the Financial Accounting Standards Board (FASB). The current expected credit losses (CECL) standard will dramatically change the way financial institutions account for credit impairment.
As we noted yesterday, the final standard includes several important, CUNA-backed improvements from the proposal, that will make compliance more manageable for credit unions. We encourage you to take a look at today’s joint statement, which includes a good overview of the new standard’s requirements.
The statement also offers some encouraging remarks regarding the scalability of the standard to smaller institutions. “[T]he new standard allows institutions to apply judgment in developing estimation methods that are appropriate and practical for their circumstances. . . . [T]he agencies expect that smaller and less complex institutions will be able to adjust their existing allowance methods to meet the requirements of the new accounting standard without the use of costly and complex models.”
Here are some other relevant points from the statement that may be of interest:
Measurement Methods: The new accounting standard allows expected credit loss estimation approaches that build on existing credit risk management systems and processes, as well as existing methods for estimating credit losses. However, certain inputs into these methods will need to change to achieve an estimate of lifetime credit losses. For example, the input to a loss rate method would need to represent remaining lifetime losses, rather than the annual loss rates commonly used under today’s incurred loss methodology.
Data: To implement the new accounting standard, institutions should collect data to support estimates of expected credit losses in a way that aligns with the method or methods that will be used to estimate their allowances for credit losses. Depending on the method selected, institutions may need to capture additional data and may need to retain data longer than they have in the past on loans that have been paid off or charged off.
Transition: Institutions should not begin increasing their allowance levels beyond those appropriate under existing GAAP prior to the standard’s effective date.
We will be following up with NCUA to ensure the agency provides guidance sufficient to allow credit unions of all sizes to comply with the new accounting standard.
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