New guidance on accounting for expected loan losses currentlyunder consideration by the Basel Committee on Banking Supervisionmay have negative ramifications for U.S. credit unions, accordingto the World Council of Credit Unions.

The Madison, Wis.-based international trade group is pressingfor clarification and adjustment in several areas so that the BaselCommittee's guidance, when issued, doesn't trigger similar rulesproposed by the Financial Accounting Standards Board that couldchange the way U.S. financial institutions account for creditlosses, according to World Council Vice President and GeneralCounsel Michael Edwards.

Edwards' April 30 letter commenting on the Basel Committee'sFebruary consultative document, “Guidance on accounting forexpected credit losses,” praises the document's recognition ofproportionality when administering the guidance among financialinstitutions of various sizes and complexity.

But World Council's letter strongly opposed the committee'ssuggested substitution of more stringent, pro forma regulatoryaccounting principles in place of generally accepted accountingprinciples, better known as GAAP. The letter also challenged theuse of “practical expedients” to extend rules that apply to lendingactivities practiced by internationally active banks to lesssophisticated credit unions, which rarely conduct internationalbusiness.

“The Basel proposal is relevant to U.S. financial institutionsbecause it would require banks and credit unions to adopt an'expected credit loss' approach to establishing reserves for creditlosses,” Edwards said during a subsequent interview. “The 'expectedcredit losses' approach under U.S. GAAP is the FASB's proposed 'current expected credit losses,'which CUNA and other U.S. credit union organizations haveopposed.”

Both FASB and the International Accounting Standards Board hadbeen developing new models to account for loan losses in light ofproblems caused during the recent recession. On Dec. 20, 2012, FASBissued for public comment a proposal that would change the wayfinancial institutions accounted for expected loan loss.

FASB's proposed model for CECL utilized a single 'expectedcredit loss' measurement objective to recognize losses, replacingthe multiple existing impairment models in U.S. GAAP, whichgenerally require that a loss be incurred before it is recognized.Under the proposal, management is required to estimate the cashflows it does not expect to collect, using all availableinformation, including historical experience and reasonable andsupportable forecasts about the future.

The balance sheet would reflect the current estimate of expectedcredit losses at the reporting date – the allowance for creditlosses – and the income statement would reflect the effects ofcredit deterioration (or improvement) that has taken place duringthe period as a provision for bad debt expense.

The Basel Committee's current guidance, if finalized asproposed, could hasten the adoption of FASB's CECL guidelines,Edwards said. Meanwhile, U.S. credit unions and their trade groupssee inherent problems with the FASB proposal as it is currentlywritten.

Read more: NAFCU warns of two FASB proposal issuesthat will affect credit unions …

NAFCU believes the FASB proposal will have a negative impact oncredit unions with respect to two issues, according to AliciaNealon, the association's director of regulatory affairs.

First, the rule will result in an increase in credit unionallowances, misleading members and potentially affecting creditunion regulatory capital requirements, Nealon said. Second, it willimpose significant costs on credit unions by requiring increaseddata collection, implementation of proper recording systems and thehiring and training of personnel to conduct the forecast.

“The potential effects of the FASB proposal are even moreonerous when viewed in combination with the NCUA's risk-basedcapital proposal, an issue NAFCU raised in its April comment letterto the agency,” Nealon explained. “NAFCU believes FASB shouldcarefully consider the effects of its proposal in combination withthe NCUA's proposal in order to remove duplicative regulatoryconstraints on credit unions.”

As member-owned financial cooperatives that are not publiclytraded, credit unions should not be subject to the FASB's proposedrule, Nealon added. However, if the FASB insists on applying theproposed standard to credit unions, then credit unions should begiven additional time to create proper recordkeeping systems and tohire and train personnel.

“NAFCU also urges FASB to streamline and simplify the method forcalculating credit losses wherever possible,” she said.

A May 30, 2013 letter to FASB from NAFCU Regulatory AffairCounsel Angela Meyster outlined in detail the trade group'sconcerns about the proposed rule.

CUNA offered similar criticism in an Aug. 21, 2014 letter toFASB Chairman Russell Golden from then acting President/CEO BillHampel. Proposed changes to the way credit unions account for loanloss, in particular the need for additional reserve funding, wouldhave detrimental effects on credit unions, Hampel wrote.

“This unwarranted increase to many credit unions' (allowance forloan and lease losses) accounts would directly result in areduction in their retained earnings,” Hampel's letter said. “Adecrease in retained earnings can lead to a reduced capital ratios,which could trigger prompt corrective action implications fornumerous credit unions that currently do not have PCAconcerns.”

Hampel also stressed the need for FASB to consult with the NCUAin terms of proposed changes in rules, adding that the negativeeffects of the agency's proposed risk-based capital rule could becompounded by similar actions taken by FASB. He also stressed theneed for FASB to recognize credit unions' difference fromfor-profit financial institutions in its rulemaking process.

“One key distinction is that the Federal Credit Union Act limitsnet worth for most credit unions to retained earnings, making itmore difficult for them to build capital than for otherinstitutions that can raise capital in the financial marketplace,”Hampel wrote. “This limit, in effect, also restricts the ability ofthe NCUA to adjust its regulations in response to changes inaccounting standards that could affect credit unions' capability tobuild capital, as is possible for other federal financialregulators.”

Hampel, now CUNA's chief policy officer, did not respond toCU Times' request for further comments.

The FASB board met as recently as March 11 to discuss decisionsregarding transition requirements. The new rule in whatever form ittakes may come as early as 2017, sources said.