Credit unions will likely begin implementing the Financial Accounting Standards Board's current expected credit loss standard in December 2019. But the industry still does not yet know exactly what it will be implementing.

Though the alterations to the draft, unveiled during the FASB's Transition Resource Group for Credit Losses meeting on April 1, are a step in the right direction, more could be done to address the concerns of credit unions.

Under the CECL standard, the allowance for loan and lease losses would reflect a credit union's current estimate of the contractual cash flows that it doesn't expect to collect. This estimate would be based upon management's expectations after considering past events, current conditions, and reasonable and supportable forecasts.

Throughout the process of creating this accounting standard, NAFCU has repeatedly asked the board to consider the unique structure of credit unions as member-owned, not-for-profit institutions. NAFCU holds that credit unions should not be subject to the proposed accounting update as the costs far outweigh the benefits.

However, even if the FASB won't consider the special structure of credit unions specifically, at a minimum, the lack of transparency surrounding the proposal warrants a delay in implementation and the release of an updated exposure draft for public comment.

NAFCU believes that in order to facilitate a smooth transition to the new method of credit loss accounting, it is critical that credit unions be provided enough time to ensure they are adequately prepared by the effective date. Given the delay in finalization, NAFCU has asked the board to delay implementation of the CECL standard for one year.

During the FASB's April TRG meeting, FASB Member Lawrence Smith said the board may consider reopening the discussion on the standard's implementation date. NAFCU encourages such discussions.

The association has also urged the board to issue an updated credit losses exposure draft, with any and all changes made as a result of board action, in order to solicit additional public comments. The opportunity to publicly comment on an updated draft would benefit both credit unions and other stakeholders.

Credit unions have communicated to NAFCU a lengthy list of concerns over the accounting standard and how it will impact service to their more than 103 million member-owners. For example, this proposal will result in an increase in credit union allowances, in turn misleading members and potentially affecting credit union regulatory capital requirements. Also, this proposed standard will potentially impose significant costs on credit unions by requiring increased data collection, implementation of new recording systems and the hiring and training of additional personnel.

Since credit unions are focused on meeting members' needs and not profits, the primary reader of credit unions' financial statements is the NCUA – not individual or institutional investors. Because of this, this standard – geared toward publicly held entities – will be difficult and costly to apply to credit unions.

Also, since credit unions do not currently compile the bulk of the information the proposal would require them to consider, the new standard stands to impose a significant and unnecessary cost burden on the industry.

Lawmakers have also relayed their concerns to the FASB on this proposal. In February, Reps. Scott Tipton (R-Colo.) and Patrick Murphy (D-Fla.), and 60 other House members sent a NAFCU-endorsed letter to the FASB raising concerns about how the CECL standard could hurt credit unions and community banks.

Credit union representatives are also speaking up about the accounting standard. NAFCU-member credit union representatives serving on the association's regulatory and legislative committees told the board in a letter earlier this month that issuing an updated draft for public comment is both “necessary and important.” These two NAFCU committees are working groups made up of more than 50 credit union professionals.

The committees, as well as NAFCU, have also pointed the FASB to the Administrative Procedure Act, which requires federal agencies to engage in subsequent comment periods if changes are made to a rule that make it no longer a logical outgrowth of the initial proposal. While the FASB is a private, nonprofit organization and is not subject to the requirements of the act, the FASB should still voluntarily issue any updated exposure draft for public comment prior to finalization.

As work on this draft continues, NAFCU urges the FASB to work closely with the credit union industry and allow it to voice concerns and suggestions as often as possible on this issue.

Alexander Monterrubio is director of regulatory affairs for NAFCU. He can be reached at 703-842-2244 or amonterrubio@nafcu.org.

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Concerns Abound Over FASB&rsquo;s Credit Losses Proposal

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Concerns Abound Over FASB’s Credit Losses Proposal