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Thursday, January 14, 2016

Nichols Calls for More Clarity on Loan Loss Accounting Standard

In a letter to FASB, ABA President and CEO Rob Nichols called for more clarity on the proposed Current Expected Credit Loss accounting standard, highlighting several key concerns that must be addressed before the standard can take effect. Nichols’ letter comes in advance of a long-awaited roundtable – which ABA has urged since 2014 – that FASB plans to host with bankers, regulators and auditors to discuss the standard and its implementation.

At the core of ABA’s concerns is whether or not banks will be able to successfully implement CECL, and whether the model would actually result in an improvement in the accounting for credit impairment given its dependency on long-term economic forecasts, which are notoriously unreliable. Nichols pointed out that despite a number of discussions with FASB and others, no agreements have been reached with regard to the methods, processes, data or documentation that would be required under the new standard. Nor, he added, has there been any concrete determination on the scalability of CECL for smaller institutions.

Nichols wrote:
We believe the goal of scalability is linked to simplicity, which is extremely important both for banks and users of their financial statements. However, it is difficult to see how most community banks can implement a non-complex CECL model that will pass audit or examination muster in this environment.

Nichols urged FASB to thoroughly examine the cost burdens the new standard would impose -- both up front at implementation and subsequently as a result of ongoing audits and examinations -- and whether or not the benefits of the new model truly outweigh its costs.

Acknowledging that the development of the CECL model -- which represents the biggest change in the history of bank accounting -- has been a lengthy and complex process, Nichols thanked FASB for its continued collaborative efforts with ABA over the past several years to develop a workable solution for banks and investors. Nichols also shared the letter with top banking regulators to ensure they understand ABA's concerns.

Read Nichols' letter.

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