Posts tagged ‘FASB’

Post COVID Recovery Poses a Test for CECL Compliance

There are two ways to prepare for your credit union’s transition to the Current Expected Credit Loss accounting standard, lovingly referred to as CECL, with which your credit union must comply starting in 2023: you can either be using this time to research your credit unions lending history and extrapolating lessons from the larger financial institutions that are already complying with a standard or you can continue to put CECL on the back burner in the hope that it will once again be delayed or eliminated completely for smaller financial institutions. If you choose the former approach then this blog is for you.

This morning, yours truly wants to highlight this article in the WSJ discussing the challenges faced by the banking behemoths as they determine how much to reduce their reserves. As the article explains CECL is complicating bank decisions on how much to reduce the reserves: “jumping the gun could be dangerous: Lowering reserves too quickly and then needing to rebuild them could hurt companies’ credibility and reduce income, accountants and advisers say.”

Even taking the historic nature of the economic shutdown into account, it is hard to believe that a huge spike in reserves wasn’t in part a reflection of uncertainty over the proper treatment of loans under CECL. According to the WSJ, in the second quarter of last year, banks had stashed away almost $70B compared to the $12B they had put aside at the same time in 2019.

Now they are reducing the reserves.  But the question of just how dramatically and quickly they should assume that the economy is recovering remains anyone’s—dare I say it— guess. Take for instance the most recent jobs report which was so underwhelming that even the U.S. Department of Labor acknowledged that the economy still has a steep hill to climb. Conversely, consumer credit is increasing and there is plenty of evidence out there that jobs are available for people who want them.

Put all these factors into your CECL blender and ask yourself if any of these macro-trends impact your credit union and if so how much? In many ways implementing CECL is trickier for medium-sized and smaller institutions than it is for the larger guys who know that their institutions will be shaped by larger economic trends that may not even touch your credit unions field of membership.

Those of you hoping for more CECL relief should mark your calendar for May 20th. The Federal Accounting Standings Board (FASB) will be holding a round table discussion on CECL implementation, a clear signal that it is open to making further changes. For those of you hoping that CECL never comes, keep your fingers crossed.

As for your faithful blogger, I remain a CECL contrarian who believes that properly implemented, it makes sense to adopt an accounting standard that recognizes that a certain number of your performing loans will end up being delinquent. That being said, however, CECL has emerged as a potentially significant counter-cyclical drag on economic growth. I wouldn’t be surprised to see pressure grow on the FASB to modify its requirements.

May 11, 2021 at 10:30 am Leave a comment

FASB Green Lights CECL Delay

Good morning folks.

As expected, the Federal Accounting Standards Board approved its proposals to delay the effective date of CECL for smaller businesses, including credit unions until January 1, 2023. The delay is welcome news, particularly for the smaller credit unions which are concerned that the standards will negatively impact their bottom line.

In making the decision, the FASB announced a change in its approach to implementing major changes to its accounting standards such as CECL. Although there are exceptions to this new approach, institutions which are required to file financial reports with the SEC will have more time to adapt to new accounting rules than the larger companies subject to SEC oversight. According to the FASB, it received 35 comment letters from credit unions and credit union associations.

Under traditional GAP accounting standards, companies have to recognize losses on loans when they become probable. In contrast, under CECL, credit unions and other institutions will have to account for expected credit losses based on the past performance of similar loans. For what it’s worth, yours truly remains very much in the minority within the credit union industry in believing that IF CECL is properly implemented and understood by examiners, the accounting change is logical and can be easily implemented by smaller credit unions. The FASB has repeatedly stressed that it does not expect smaller institutions to adopt the same analytical models as bigger ones.

How Low Can Interest Rates Go?

There is more and more talk about the possibility that the Fed could introduce negative interest rates in a future economic downturn. This recent analysis by the Federal Reserve Bank of San Francisco analyzing the experiences of central banks around the world that have adopted negative interest rates has generated a fair amount of attention. In addition, the Wall Street Journal is reporting this morning that an increasing number of option traders are betting that interest rates could go negative within the next two years. Yours truly is in no position to make predictions on the future interest rates, but the very fact that serious people treat negative interest rates as a distinct possibility underscores how limited the Fed’s options will be to combat the next economic downturn using traditional stimulus pools. This is a long winded way of saying that interest rates are already near historic lows.

Have a nice weekend, see you on Monday.

October 18, 2019 at 8:42 am Leave a comment

CU’s Need CECL Guidance Now

Image result for doing taxesCredit unions don’t have to start complying with FASB’s current expected current loss (CECL) model until the year beginning after December 15, 2021 but believe it or not the clock is running and for smaller banks and credit unions CECL is emerging as the top regulatory issue for credit unions. Simply put, just as credit unions and community banks for that matter, should be preparing for the new accounting standard right now, NCUA should be providing accounting guidance, yes accounting guidance, explaining what methods for calculating the expected losses on a credit union’s loan portfolio will be acceptable.

Here is the problem. While I continue to believe that CECL makes sense provided it is implemented in a way which allows for a $50 million credit union to anticipate its expected loan losses in a less sophisticated way than a $10 billion credit union or a $250 billion bank holding company, this only works if the regulators and the Federal Accounting Standards Board start issuing guidance on proper accounting standards. Like it or not, NCUA is now in the accounting business and its time for it to provide appropriate assistance to credit unions preparing to implement these new requirements.

Recently, the American Bankers Association sounded the alarm when it issued this white paper complaining that one suggested method for complying with CECL is actually not adequate to comply with CECL. It explained that “While non-complex banks may be allowed to utilize less complex models, life of loan credit risk analysis is not easy and smaller banks and credit unions are waiting on regulators and FASB to tell them how to proceed. In the two-and-a-half years since the CECL standard has been issued, the only guidance from FASB or the banking agencies to community banks has been to say that the questionable WARM method “may be an appropriate method.”

In addition, CUNA’s Jim Nussle wrote a letter to NCUA Chairman McWatters urging the agency “to provide additional resources for credit unions, including an interactive resource, such as a webinar. CUNA is ready and willing to assist with this effort in any way we can.”

Now don’t get me wrong, I’m in no position to say who is right or who is wrong when it comes to the nuances of accounting but I am qualified to spot a quagmire coming down the tracks when I see one and to help sound the alarm.

Tax Guidance For Highly Paid Executives Released

Speaking of guidance, Section 13602 of Tax Cuts and Jobs Act, Pub. L. No. 115-97 imposes an excise tax on employee remuneration of $1 million or more. A faithful reader of the blog gave me a head’s up yesterday that the IRS has issued technical guidance for complying with this change in the code which will impact some credit unions.

 

February 8, 2019 at 9:27 am 2 comments

Accounting Standards Finalized

Greetings from Saratoga Springs where we are, of course, holding an annual convention.  Incidentally, a very reliable source told me that Saratoga is the birth place of the American Bankers Association.

To the dread of credit unions everywhere, the FASB finalized its Current Expected Credit Loss Standards (CECL).  Why are credit unions so concerned about this?  Because the accounting standards, when fully implemented in 2020, will require financial institutions including credit unions to anticipate potential losses on loans and account for them earlier in the loan cycle.  This means, that if the standard works as anticipated, financial institutions will have to put more money aside to account for losses.  A second concern credit unions have is that complying with the new standard will require them to adopt and invest in sophisticated analytical tools to better project anticipated losses.

The FASB has been adamant that many small institutions will be able to comply with the new standard using their existing practices.   In a document accompanying the release of the final standards yesterday, the Board explained that “most organizations should be able to leverage existing systems and processes to comply with the new standard, and organizations will not need to forecast economic conditions over the entire contractual life of long-dated financial assets.”

I would save this quote for your examiner simply because, while I believe that many fears about this new standard have been exaggerated, I agree with those who argue that the key to the successful adoption of this new standard will hinge on examiner education.  Of course, this is one that you should sit down and discuss with your accountant.

Legislature Goes Into Overtime

The New York State Legislature is still not quite done completing its work so is still in session today.  I will provide a recap of the legislative session in Monday’s blog.  Try to contain your excitement.

June 17, 2016 at 8:14 am Leave a comment

Eight Trends that will impact CUS in 2016

I like to use my final blog of the year to look ahead to the trends that will most impact the industry next year.  Here is my list of educated guesses.

Accounting for the next disaster.  The Federal Accounting Standards Board is poised to finalize accounting standards that will directly impact how credit unions and banks account for potential loses.  The proposal could have a bigger impact on credit unions than the Risk Based Capital rules, so get your accountant on speed dial.

Overdraft Overhaul. Are you ready to have your members opt in to all overdraft services?  How about limits on the size and number of overdraft fees?  What about new disclosures?  All of these are possible when the CFPB formally looks to limit the use of overdraft services this year.

China Syndrome. World events have had more and more of an impact on the economic environment in which credit unions operate.  My nominee for this year’s Greece is China.  If the slowdown in the Chinese economy ends up being  more sustained and severe than pundits currently suspect we could be looking at a recession in the U.S. and political instability in an increasingly nationalistic China for years to come.  In a worst case scenario think Putin on steroids.

Political Fantasy. Donald Trump offers a blanket insult to everyone in America and his poll numbers skyrocket because of his level-headed even handedness.  Not to be outdone, Senator Cruz insults the entire world.  Jeb Bush performs surprisingly well in New Hampshire and gets enough momentum to stick around.  Speculation rises that Republican Party elders hope that no one gets the delegates they need to secure the party’s nomination.  In a brokered convention, Paul Ryan emerges as the consensus candidate and narrowly defeats Hilary after Trump and Ben Carson both run as independents.  My point is, Silly Season is fast approaching.  Don’t expect to see anything useful accomplished in Congress next year.

Will the industry hang together or hang separately? With dual membership requirements being phased out, I certainly hope that whatever new structure emerges continues to emphasize the need for a coherent and unified voice on credit union issues.  I would hate to see a circular fire squad emerge that would benefit no one but banking lobbyists.

The year of Guidance.  With the overhaul of MBL regulations and further regulatory tutorials on interest rate risk on the horizon, we will start finding out just how much more flexibility credit unions have when complying with general mandates as opposed to black and white regulations.

FOM Reform.  NCUA’s proposed FOM reforms are out for comment and, although they are a step in the right direction, my guess is that the industry will find that not enough can be done by amending regulations.  Congress needs to act, but don’t hold your breath. In the meantime, state policy makers are where credit unions will have to turn if they want greater FOM flexibility.

Fewer but Larger Credit Unions.  Are credit unions an endangered species?  No, but expect their number to decline and the survivors to get even bigger.  In 2014, the majority of credit unions lost members.  In addition, at the end of October, CUNA Mutual reported that there were 6,264 CUs in operation, down 36 credit unions from one month earlier.  Year-over-year, the number of credit unions declined by 316, more than the 254 lost in the 12 months ending in October 2014.  There is no good reason to think that this trend won’t continue or even accelerate.  (https://www.cunamutual.com/~/media/cunamutual/about-us/credit-union-trends/public/dec_2015_cu_trends_report_media_file.pdf)

On a happier note, thanks for reading, Happy Holidays and I will be back blogging next year. Now it’s off to Grandma’s house I go.

December 23, 2015 at 10:40 am 1 comment

Delay Announced In Radical Accounting Changes

Credit unions got a temporary stay of execution yesterday on one of the most importantly regulatory proposals that no one really wants to think about.  The Financial Accounting Standards Board decided to put off until early next year final action on new accounting standards that would radically alter the way your credit union accounts for anticipated losses. ( Perhaps  the Board didn’t want to deal with such a weighty issue around the time of the office holiday party.  You know how crazy  accountants can get when they get a few in them?  Good Times )

Just how big a deal is this proposal? With the caveat that I am so bad at accounting that family legend has it that it was  apparent at the age of ten that I would not be taking over my father’s accounting practice,  if the FASB goes  forward with this proposal  it will have a more direct financial impact on most credit unions than the risk based capital reforms we have spent so much time fretting  about.  Currently losses have to be recognized when they become Probable.  The FASB is moving towards an approach in which losses would have to be accounted for  based on expected losses   using a broader range of data such as the historical performance of similar contracts.  It raises the real possibility that more money will have to be put aside to  guard against potential future losses  earlier in a loan’s life  to guard against losses that may or may not materialize.  As the exposure draft explains:

“the estimate of expected credit losses would be based on relevant information about past events, including historical loss experience with similar assets, current conditions, and reasonable and supportable forecasts that affect the expected collectability of the assets’ remaining contractual cash flows. An estimate of expected credit losses would always reflect both the possibility that a credit loss results and the possibility that no credit loss results.”  That sounds expensive to me

And I’m not the only one.  In its comment letter the normally understated CUNA predicted that the proposed changes would cause an immediate and drastic increase to the ALLL accounts of credit unions. it contended that this increase, which could double or even triple current ALLLs, would result directly in a reduction of retained earnings for many credit unions.

Even with yesterday’s delay it is still anticipated that the new standards will be finalized in the first quarter of next year and take effect in 2019.  You don’t have as much time as you think.  If I were you I would be getting a preliminary accounting assessment of how this proposal could impact your CU before your accountant starts hitting the holiday party circuit.

Here  is some additional information

ihttp://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176160587228&acceptedDisclaimer=trues a link to the proposal and FASB’s announcement

November 13, 2015 at 9:25 am Leave a comment

In God, and Accountants, We Trust

Yesterday, the Court of Appeals for the Second Circuit addressed for the first time a challenge to the Constitutionality of federal legislation that mandates that “in God we trust” be placed on all U.S. currency. See Newdow v. Peterson, 13-4049, Ct. App. (Second Circuit).  In making its ruling, the Circuit joined several other federal courts in upholding the mantra against First Amendment challenges that it violates the Establishment Clause.

The First Amendment provides that “Congress shall make no law respecting an establishment of religion.”  So, in all honesty, if you were to limit yourself to just the plain text the people who brought this suit have a point.  They are self-proclaimed Atheists who feel that by having to carry around coins and cash emblazoned with a reference to God, they are being made to endorse a religious view they don’t hold.

However, the Establishment Clause has never been read as strictly as they are suggesting it should.  In this case, currency clearly has a secular purpose and most people understand that someone handing a merchant a dollar bill is executing a financial transaction and not engaging in a religious activity.  Bottom line:  as far as the Second Circuit is concerned, we can continue to trust God if we want.

New Accounting Guidance for Revenue Recognition Finalized

First, a caveat:  my father and sister are accountant and my niece, who occasionally reads this blog, seems to be having a great time training to become one at Northeastern University.  I am not and there is a reason I went to law school rather than work with my father.  That being said, you may want to ask your accountant what impact, if any, a new guidance finalized by the Financial Accounting Standards Board (FASB) may have on your credit union.  Specifically, the guidance aims to standardize the recognition of revenue derived from contracts with customers.  As a result, it will not impact the purchase or sale of a financial instrument, but it may impact when your credit union can recognize fee income generated from a mortgage, for example.

On that note, have a nice day and great job by all of you who weighed in on NCUA’s risk-based capital proposal.

 

May 29, 2014 at 8:29 am Leave a comment


Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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