Friday, May 05, 2017

SEC accounting chief concerned over calls to delay new credit losses standard

By John M. Jascob, J.D., LL.M.

SEC Chief Accountant Wesley R. Bricker has expressed concern about recent calls to put on hold the Financial Accounting Standards Board’s new credit losses standard, pending an analysis of its long­term macroeconomic effects. Speaking before the Baruch College Financial Reporting Conference, Bricker emphasized the value of independence in the standard­-setting process, saying that accounting standards must be perceived as being above political concerns and special interests for investors to place full confidence in them. Accordingly, he urged those persons that do not like the direction or the outcome of the new standard to use appropriate forums provided by FASB to express their disagreements or doubts.

Credit losses. Bricker’s comments may have been aimed in part at the American Bankers Association, which last year called the adoption of the new standard "the biggest change in bank accounting over the past forty years." Adopted by the FASB on June 16, 2016, the standard’s current expected credit losses methodology (CECL) will replace the incurred loss methodology that financial institutions currently use to recognize credit losses. Under the new methodology, recognition of a credit loss no longer will be delayed until that loss is probable; rather, institutions will be required to use a broader range of data to estimate likely credit losses over the life of an asset or pool of similar assets. The new standard takes effect in 2020 for public companies that file with the SEC.

Appropriate channels. Without naming the targets of his comments, Bricker worried that the methods used by critics to express disagreements or doubts about the CECL could serve to undermine FASB’s independence and its due process, and could distort the objectives of general purpose financial reporting standards. For example, Bricker reminded his audience of the pressures at work when the FASB required stock options to be expensed.

Bricker observed that the FASB developed the new credit losses standard in response to the needs of investors for more timely information about credit losses. By better anticipating credit losses, loan loss provisions under the new standard can provide investors with more timely information about the risks and economic conditions that affect providers of credit. Bricker also said that academic research has established that more transparent financial reporting leads to a lower cost of capita by reducing investor uncertainty about company prospects.

Bricker reminded his audience that the new credit losses standard applies to all industries, and banks are both providers of credit loss information when they report GAAP financial information as well as users of that information in their underwriting process. In Bricker’s view, if there are questions about implementing the accounting requirements of the new standard, then the FASB is the right body to address them. He urged banks to support the implementation process by identifying issues and submitting them to the FASB Transition Resource Group for Credit Losses, listening to those meetings, and then being willing to participate.

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