FASB Credit-Loss Proposal Ruffles Feathers
The Financial Accounting Standards Board is getting an earful from credit unions and trade associations. Even NCUA Chairman Debbie Matz, like others, is concerned about the accounting board’s exposure draft that would require financial institutions to base loan-loss allocations on expected losses, rather than incurred losses. In addition to requiring complex economic modeling, the standard would also require the allowance for loan and lease losses to cover the entire life of the loan at the time of funding.
Matz wrote in a comment letter that FASB’s proposed credit-loss accounting standard presents safety and soundness concerns for small and medium-sized credit unions. Industry experts estimate the accounting standard could double or even triple current allowances for loan and lease losses.
Peter Putnam, chief financial officer of the $716 million Credit Union of Southern California, pointed out in his comment letter that the proposal violates the Matching Principle, a cornerstone of accrual accounting.
The Brea, Calif.-based CFO explained that the Matching Principle requires expenses to be recorded in the same period as the revenues that relate to those expenses. By requiring expected future loan losses to be recorded immediately, the proposal violates that principle.