Implementing CECL has brought about a host of accounting and other technical questions. The Financial Accounting Standards Board (FASB) works with the industry through a series of meetings to identify these questions, evaluate industry feedback, and periodically issue clarifying statements. We will continuously publish summarized points of interest from these meetings as they arise.
FASB Board Meeting: December 13, 2017
The FASB board met on December 13, 2017 to address issues related to the implementation of ASU-2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The following specific issues were discussed.
- Troubled Debt Restructurings
- Variable-Rate Financial Instruments
- Subsequent Events
For the complete text of decisions made by the board, see the FASB memorandum, dated December 19, 2017.
In summary, the decisions addressed the following:
Troubled Debt Restructurings (TDR)
The Board decided to provide transition relief for entities that elect to use a prepayment-adjusted effective interest rate (EIR) in a discounted cash flow (DCF) approach to measure credit losses on TDRs that exist at the adoption date. Entities may calculate the prepayment-adjusted EIR based on the original contractual terms of the loan and prepayment assumptions as of the date of adoption.
Variable-Rate Financial Assets
The Board decided to allow entities to determine the EIR and expected cash flows using their own expectations of future interest rate environments when estimating credit losses on variable-rate financial assets using a DCF method, provided those expectations are reasonable and supportable. However, the use of projections will not be required.
The Board decided that when determining an estimate of credit losses, an entity should not recognize in the financial statements the effect of any events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. However, subsequent events should be reflected in the estimate of credit losses if an entity determine an error correction is necessary under Topic 250, Accounting Changes and Error Corrections.
RiskSpan conducted a CECL webinar with Grant Thornton on December 14, 2017. For more detail about recent TRG and FASB decisions on CECL from CECL TRG member, Graham Dyer of Grant Thornton, please visit: http://resources.riskspan.com/webinar-cecl-accounting-requirements-advanced-techniques.
FASB Board Meeting: September 6, 2017
The FASB’s board meeting on September 6, 2017, discussed issues related to troubled debt restructurings (TDRs) that were not resolved during the Transition Resource Group (TRG) meeting1 in June. The September board meeting concluded on bank responsibilities related to the following:
- TDR Identification – When a loan is individually identified as a reasonably expected TDR, all effects of the TDR should be recognized in the allowance for loan loss.
- TDR Measurement – At the point at which an individual loan is specifically identified as a reasonably expected TDR, an entity must use a Discounted Cash Flow (DCF) method if the TDR involves a concession that can be captured using only a DCF method (or reconcilable method).
TRG Meeting: June 12, 2017
During its meeting on June 12, 2017, the TRG discussed the following topics relative to Credit Losses:
- Discounting expected cashflows at the effective interest rate
- Scope of purchased credit deteriorated (PCD) assets for beneficial interests
- Transition guidance for PCD assets
- Accounting for troubled debt restructurings (TDRs) – addressed at September 6, 2017, board meeting
- Determining the estimated life of a credit card receivable
We will continue monitoring these topics.
All information reported and summarized here is from the FASB website at www.fasb.org. Some items are reported verbatim to maintain the integrity of the FASB statement.
 The Credit Loss Transition Resource Group consists of 16 industry experts who meet periodically and whose purpose is to solicit, analyze, and discuss stakeholder issues arising from implementation of new guidance. TRG does not issue guidance. Only FASB issues guidance.