As The Deadline Looms For A New Accounting Standard, Many Banks Are Still Looking For Answers

A new accounting standard expected to be implemented this year has companies preparing for uncharted territories.

In a response to the financial crisis and the realization that many financial institutions did not have the appropriate amount of cash reserves on their balance sheets to account for their credit risk, the Financial Accounting Standards Board enacted the Current Expected Credit Losses standard (aka CECL) in 2016.

Unlike the current standard, known as Allowance for Loan and Lease Losses (ALLL), CECL requires companies to account for expected losses over the life of a loan when maintaining cash reserves, and not simply account for losses already incurred on loans.

CECL goes into effect on Dec. 15 for entities that file with the SEC, meaning companies are coming up against the deadline to implement new accounting practices. However, there is concern that not enough guidance has been provided for it to be put into practice.

As OTC Markets recently noted, “Today, many community banks still find themselves rushing to clarify their course of action for CECL implementation. Although many iterations of FASB text and timelines are available, very little exists in the form of practical guidance.”

Earlier this month, a bipartisan group of House lawmakers introduced a bill calling for a halt to the implementation of CECL until an impact study can be completed. A companion bill was previously introduced in the Senate, and both houses of Congress are reportedly looking to delay CECL implementation as far out as 2022.

In a statement, Rep. Vicente Gonzalez, a Texas Democrat and co-sponsor of the House bill, noted that “CECL affects a very broad part of our business sector who engage in lending, big and small. My concern is that we have paid too much attention to the largest entities and not enough to the smallest, where a $10,000 compliance bill just to learn whether you do or do not need to change your business plan, is just too much for some to absorb.”

With the clock ticking, financial firms are scrambling to find solutions. Qaravan, which OTC Markets Group acquired earlier this year, recently unveiled its CECL solution. The software provides a guided Q&A interface that helps bankers and financial professionals address CECL requirements and develop a loss allowance under the new standard. By offering banks a greater sense of clarity at a lower price point, the solution is meant to help address concerns like those mentioned by Rep Gonzales.

"Texas is home to over 400 bank headquarters, and [Rep Gonzales] is highlighting just how much the uncertainty around CECL impacts the most vulnerable banks in his district and across the country," said Tony Hodson, Senior Vice President of Market Data at OTC Markets Group. “But the question remains: what role can Congress play to help remove doubt or add clarity? CECL is a FASB accounting standard, not government legislation. Right now, banks are looking for a way to demonstrate a good faith implementation effort without having to completely reinvent their regulatory reporting process.”

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