A new standard in reporting expected credit losses could have a significant impact on financial institutions.
“It’s the biggest accounting change I think that banks have been subject to in a long time,” Reza Van Roosmalen, a KPMG LLP managing director, told the Journal of Accountancy.
The Financial Accounting Standards Board has changed the reporting requirements of an expected credit loss from an incurred-loss to an expected-loss approach.
Members of the International Accounting Standards Board moved from incurred-loss to expected-loss accounting in 2014.
The FASB says the change aims to align accounting with the economics of lending by forcing the immediate listing of the full credit losses that are expected. Experts say the standard change will require credit risk and accounting groups to work together closely.
“There’s going to be a need for education from accounting to the rest of the business partners,” said Jonathan Prejean, a Deloitte & Touche LLP managing director. “Obviously, the credit risk is going to be involved, and your forecasting and your planning, and even the lines of business and how they write their business.”
In implementing the new expected credit-loss standard, bookkeeping professionals may want to consider three things:
- Standard’s reach: While a major impact for financial institution, the change applies to other firms as well. Items falling within the new credit-loss standard include lease and trade receivables, and held-to-maturity debt securities. “This is not just a banking standard,” said Jonathan Howard, a Deloitte & Touche partner. “It applies to all entities that have assets that represent the right to receive cash that they carry at amortized cost.”
- There’s time: Because the new FASB standard does not go into effect until 2020 for public companies, there is time to collect the necessary data, if not already at the firm’s disposal. “They can start pulling that data and making sure they have it, and make sure they’re collecting it if they have the ability to collect it,” Prejean said. “If they don’t, make sure they can find a way to get it, and then make sure that it’s appropriate for financial reporting.”
- Prior work: Banks may be able to draw on work they did for previous compliance exercises. “It’s important for banks to think about how they could approach the standard in the most efficient and scalable way, and look for similarities and synergies and maybe even corroborate some of the data and modeling as far as they can with existing models,” Van Roosmalen said. Multinational organizations that have been implementing International Financial Reporting Standards 9 may be able to use that work to their advantage as they implement the FASB standard. Banks that have gone through stress testing can expand on that work to include the new standard.
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