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No Extra Delay on Loan Loss Rules for Smaller Banks

Oct. 16, 2019, 5:36 PM

A persistent push by some credit unions, lawmakers, and bank lobbyists to delay the biggest change to bank accounting in decades has come up dry.

The Financial Accounting Standards Board on Oct. 16 held firm to a plan to make big banks start recording losses earlier on failing loans starting in 2020 and other institutions follow suit beginning in 2023.

The accounting rulemakers also resisted calls from some audit firms and small banks to widen the pool of financial institutions that could benefit from extra time to implement the current expected credit losses (CECL) standard.

“Today we’re making the right decision,” said FASB member Harold Schroeder, who said he was open to the idea of a larger number of banks getting extra time to follow the major new accounting rules, but said he also believed sticking to a cutoff defined by a Securities and Exchange Commission threshold made sense.

FASB will allow privately held institutions, credit unions, and a group of publicly traded businesses the SEC calls smaller reporting companies until 2023 to overhaul how they report losses on loans. A business can meet the smaller reporting company threshold in two ways: if it has a public float of less than $250 million or if it has a public float of less than $700 million and annual revenue of less than $100 million. FASB’s latest decision was outlined in a plan the board released in August.

The cutoff means some very small banks would have to transform their accounting at the same time as financial heavyweights like Wells Fargo & Co. and Citigroup Inc., BDO USA LLP, Crowe LLP and others told FASB, arguing the board should consider a higher threshold so more small banks have more time.

But if FASB were to draw the line at a higher level, such as the SEC’s definition of large accelerated filers, only 10 percent of banks would have to follow CECL in 2020, FASB project manager Christopher Roberge said.

A unanimous board agreed to keep the plan intact, although FASB member Christine Botosan said she was concerned that having some publicly traded banks follow major new rules in 2020 and some in 2023 would make the jobs of analysts and investors much harder.

“So I think that there is a risk. I don’t know what that risk is. It may be nothing; it may be significant,” Botosan said.


FASB has faced intense pushback over its loan loss accounting standard. Developed in the aftermath of the U.S. financial crisis a decade ago, the standard requires banks to forecast the losses they expect when they write loans to customers and book corresponding reserves to cover those losses. It’s meant to correct much-criticized accounting that allows banks to record losses only after they have happened. That practice came under scrutiny during the financial crisis, when bankers knew losses were coming but their balance sheets didn’t reflect that.

Many banks say they expect to book more losses than they do under outgoing accounting rules, which could make them reluctant to lend in an economic downturn.

“The anxiety is really over what’s the impact going to be,” said Michael Loritz, shareholder at Mayer Hoffman McCann P.C. in Kansas City, Mo.

On Oct. 11, the Center for Responsible Lending decried the rule change as creating a “significant disincentive” for lenders to originate loans to low- and moderate-income families and communities of color because “the up-front charge will be relatively larger than for ‘prime’ loans, even when the lender charges an interest rate that will fully cover the expected risk of loss.”

American Bankers Association decried FASB’s Oct. 16 decision, saying it was “deeply disappointed” that FASB has yet to pause implementation for all companies until a “rigorous quantitative impact study can be completed to assess its full effects.”

Leases, Hedging, Insurance

Separately, FASB followed through with plans Oct. 16 to offer relief to businesses on three other significant accounting standards.

Private companies and not-for-profit organizations will get until 2021 to record on their balance sheets for the first time liabilities associated with leasing office space and heavy equipment. Public companies started following the new accounting rules in 2019.

Private companies and not-for-profit groups will also get more time to apply new rules that expand and simplify hedge accounting, a specialized accounting method that allows companies using derivatives for its risk management strategies to keep swings out of earnings. While many companies favor the changes ushered in by the 2017 update, FASB said it wanted to give smaller organizations the option for more time.

FASB billed the moves as part of a “philosophy change” in how the board sets effective dates for major new accounting standards.

Typically, when the board sets a compliance date, it offers private companies and not-for-profit organizations an extra year to adopt it. Now, FASB plans to give private companies, smaller public companies, not-for-profit groups, and employee benefit plans two years extra time.

Separately, FASB also agreed to delay the date by which insurance companies must overhaul how they account for long-term insurance like life and annuities. The board agreed to confirm a proposal it issued in August that gives large publicly traded insurers until 2022 instead of 2021 to provide more clarity about their liabilities. Private companies and publicly traded businesses that qualify as smaller reporting companies would have until 2024 to comply.

To contact the reporter on this story: Nicola M. White in Washington at

To contact the editors responsible for this story: Jeff Harrington at; Vandana Mathur at

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