The Financial Accounting Standards Board finalized new rulesregarding credit losses, fundamentally changing how credit unions,banks and other financial institutions calculate their loan lossreserves.

In a release issued Thursday, FASB said the Current ExpectedCredit Loss rules, formally titled Accounting Standards Update No.2016-13, require credit unions and other organizations to measureexpected credit losses using historical experience, currentconditions, and reasonable and supportable forecasts.

The rules also require more disclosures regarding creditquality and underwriting standards, as well as significantestimates and judgments used in estimating credit losses. Some ofthose requirements will be optional for credit unions and othernon-public business entities.

“The new guidance aligns the accounting with the economics oflending by requiring banks and other lending institutions toimmediately record the full amount of credit losses that areexpected in their loan portfolios, providing investors with betterinformation about those losses on a more timely basis,” FASB ChairRussell Golden said.

See FASB's statement on the final rule here.

According to FASB, many loss estimation techniques in use todayare still allowed, but theinputs will have to change to reflect the full amount ofexpected credit losses. Judgment will still be a big factor indetermining which loss estimation method is appropriate, itnoted.

Inthe works since 2012, CECL has been controversial in the creditunion industry. Both NAFCU and CUNA said they are unhappy withvarious aspects of the final rule.

“We are disappointed the board did not heed our call to issue anupdated draft for public comment before finalizing this standard,”NAFCU President/CEO Dan Berger said. “Credit unions still havereservations with the standard due to its impact on theiroperations and their ability to serve members.”

CUNA Deputy Chief Advocacy Officer Elizabeth Eurgubian added,“Based on our initial look at the final standard, it appears thatthe hard work of CUNA and our member credit unions helped bringabout the final version of the standard that will make compliancemuch more manageable to credit unions. While we continue todisagree with FASB's decision to apply the new standard to creditunions, we recognize that the final standard reflects inputprovided to the FASB board and staff by CUNA and the credit unionindustry.”

For credit unions, the rules take effect for fiscal yearsbeginning after Dec. 15, 2020, and interim periods within fiscalyears beginning after Dec. 15, 2021. For public companies that filewith the Securities and Exchange Commission, the rules will beeffective for fiscal years beginning after Dec. 15, 2019. Allentities can adopt the rules for fiscal years beginning after Dec.15, 2018.