Source: https://www.ots.treas.gov/topics/supervision-and-examination/bank-operations/accounting/current-expected-credit-losses/faqs-about-cecl.html
Timestamp: 2020-05-30 06:34:56
Document Index: 715481098

Matched Legal Cases: ['art 30', 'art 208', 'art 364', 'art 363', 'art 363', 'art 363', 'art 363', 'art 363', 'art 363', 'art 363', 'art 252']

Frequently Asked Questions on the New Accounting Standard on Financial Instruments – Credit Losses | OCC
In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments–Credit Losses, to mitigate transition complexity by amending the effective date of the new accounting standard for nonpublic business entities (non-PBEs)3 to fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Accordingly, responses to questions When does the new accounting standard take effect?4, "For an institution with a calendar fiscal year that is not a PBE and has not elected early adoption, how and when should the new credit losses standard be incorporated into the institution's Call Report?, and "Can you provide a numerical example illustrating the response to the previous question (i.e., for an institution with a calendar year fiscal year that is not a PBE, how and when should the new credit losses standard be incorporated into its Call Reports)" have been updated to reflect the new effective date for non-PBEs.
Further, ASU 2016-13 applies to all financial instruments carried at amortized cost (including loans held for investment (HFI) and held-to-maturity (HTM) debt securities, as well as trade receivables, reinsurance recoverables, and receivables that relate to repurchase agreements and securities lending agreements), a lessor’s net investments in leases, and off-balance-sheet credit exposures not accounted for as insurance or as derivatives, including loan commitments, standby letters of credit, and financial guarantees. The new accounting standard does not apply to trading assets, loans held for sale, financial assets for which the fair value option has been elected, or loans and receivables between entities under common control. While there are differences between CECL and current U.S. GAAP, the agencies expect the new accounting standard will be scalable to institutions of all sizes. However, inputs to allowance estimation methods will need to change to properly implement CECL.
Until the new accounting standard becomes effective, institutions must continue to follow current U.S. GAAP on impairment and the allowance for loan and lease losses (ALLL). Each institution also should continue to refer to the agencies’ December 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses, and the policy statements on allowance methodologies and documentation4 (collectively, the ALLL policy statements) until the effective date of ASU 2016-13 applicable to the institution.5 The agencies will not rescind existing supervisory guidance on the ALLL until CECL becomes effective for all institutions.
The agencies plan to issue proposed supervisory guidance on the allowance for credit losses under CECL before the first mandatory effective date for the new accounting standard. As noted in the response to question "Are there concepts, processes, or practices detailed in existing supervisory guidance on the ALLL that will continue to remain relevant under CECL?," many of the concepts, processes, and practices detailed in existing supervisory guidance will continue to be relevant under CECL. Until new guidance is issued, institutions should consider the relevant sections of existing ALLL policy statements, the 2016 Joint Statement, and these FAQs in their implementation of the new accounting standard.
The agencies will continue to assess whether other existing supervisory guidance requires updating as a result of the new accounting standard. In general, references in other existing supervisory guidance to the calculation, measurement, or reporting of the ALLL or the provision for loan and lease losses in accordance with U.S. GAAP will remain applicable. However, these references should be interpreted as meaning the allowance or provision for credit losses on loans and leases as measured under CECL following an institution’s adoption of the new accounting standard. Additionally, related references to or discussion of the incurred loss model within existing supervisory guidance would no longer be applicable. Institutions should consider whether internal policies, including those referencing existing supervisory guidance, need to be updated or modified for the new accounting standard.
Applicability of New Accounting StandardShow
BackgroundShow
6 Collectively, the FASB and the International Accounting Standards Board.
7 When determining the contractual term of a financial asset, an entity should consider expected prepayments but not expected extensions, renewals, or modifications, unless the entity reasonably expects it will execute a troubled debt restructuring with a borrower. Refer to Accounting Standards Codification (ASC) 326-20-30-6 in ASU 2016-13.
8 Refer to ASC 326-20-30-1 for the description of this valuation account.
9 Current U.S. GAAP includes five different credit impairment models for instruments within the scope of CECL: ASC Subtopic 310-10, Receivables-Overall; ASC Subtopic 450-20, Contingencies-Loss Contingencies; ASC Subtopic 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality; ASC Subtopic 320-10, Investments-Debt and Equity Securities - Overall; and ASC Subtopic 325-40, Investments-Other-Beneficial Interests in Securitized Financial Assets.
10 Refer to ASC 326-20-50-6 for more information on vintage-based disclosures and ASC 326-20-55-79 for Example 15: Disclosing Credit Quality Indicators of Financing Receivables by Amortized Cost Basis.
11 For information on the meaning of PBEs, as well as PBEs that are not SEC filers.
12 For PBEs that are not SEC filers, the FASB allows a "phase-in" approach. This option permits such entities to start with a three-year vintage disclosure and then phase in over the next two years to the full five-year requirement described above. For example, for PBEs that are not SEC filers that adopt CECL as of January 1, 2021, their financial statements for December 31, 2021, should include vintage disclosures for years 2021, 2020, 2019, and prior to 2019. The financial statements for December 31, 2022, would include vintage disclosures for years 2022, 2021, 2020, 2019, and prior to 2019.
Collateral-Dependent Financial AssetsShow
Has the "collateral-dependent" definition changed in the new accounting standard? [December 2016]
Yes. The "collateral-dependent" definition has been altered slightly. The new accounting standard defines a collateral-dependent financial asset as "a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the entity's assessment as of the reporting date."13
Example 6 in ASU 2016-13 illustrates one way to implement the collateral-dependent concepts.14 The example below is based on Example 6 in the standard. Assume that:
Under CECL, an institution is required to measure expected credit losses based on the fair value of the collateral when an institution determines that foreclosure is probable. The new credit losses standard allows institutions to use, as a practical expedient, the fair value of the collateral to measure expected credit losses on a collateral-dependent financial asset. Under the new credit losses standard, "a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the entity's assessment as of the reporting date" is a collateral-dependent financial asset.15
Today, for regulatory reporting purposes, the agencies require the use of the fair value of collateral to measure estimated credit losses when an individually evaluated loan that is determined to be impaired, including a loan that is a troubled debt restructuring, is considered to be collateral dependent, regardless of whether foreclosure is probable.16 Although the new standard uses the term "collateral-dependent financial asset," the agencies plan to limit their requirement to use the collateral-dependent practical expedient for regulatory reporting purposes to loans. The agencies do not plan to extend this requirement to other financial assets such as HTM debt securities. In addition, an institution should use the fair value of collateral method to measure expected credit losses under CECL only on a loan HFI that individually meets the collateral-dependent definition in the new standard.
For more information on implementation of the collateral-dependent concepts, including when the fair value of collateral should be adjusted for estimated costs to sell, refer to the response to question "Has the 'collateral-dependent' definition changed in the new accounting standard?."
When using the fair value of collateral practical expedient for determining the allowance for credit losses for a collateral-dependent financial asset as discussed in the responses to questions "Has the 'collateral-dependent' definition changed in the new accounting standard?" and "Do the agencies plan to continue to require institutions to use the fair value of collateral to measure expected credit losses for regulatory reporting purposes when a financial asset is considered collateral-dependent?," should an institution make adjustments to the collateral's fair value for expected future changes in the collateral's fair value? [April 2019]
No. When applying the practical expedient to determine the allowance for credit losses on a collateral-dependent financial asset, an institution should use the collateral's fair value as of the reporting date, adjusted for estimated costs to sell, if applicable.17 Therefore, because the collateral-dependent concepts in ASU 2016-13 are based on the reporting date fair value, the standard does not permit adjustments for expected future changes in the collateral's fair value.
Nevertheless, for loans secured by real estate, if the institution obtained the collateral's market value through an appraisal18 or evaluation, an adjustment to that market value may be necessary if
The appraisal has not been performed in a manner that complies with the agencies' appraisal regulations,19 or
The evaluation is not consistent with safe-and-sound banking practices. Institutions should refer to the Interagency Appraisal and Evaluation Guidelines20 for information on obtaining and reviewing appraisals and evaluations.
13 Refer to ASC 326-20-35-5.
14 Refer to ASC 326-20-55-41 through 326-20-55-44.
15 Refer to ASC 326-20-35-5.
16 Refer to the Glossary entry for "Loan Impairment" in the Call Report instructions.
17 Refer to ASC 326-20-35-5.
18 The term "market value" as used in an appraisal is based on similar valuation concepts as "fair value" for accounting purposes under U.S. GAAP. For both terms, these valuation concepts about the real property and the real estate transaction contemplate that the property has been exposed to the market before the valuation date, the buyer and seller are well informed and acting in their own best interest (that is, the transaction is not a forced liquidation or distressed sale), and marketing activities are usual and customary (that is, the value of the property is unaffected by special financing or sales concessions). The market value in an appraisal may differ from the collateral's fair value if the values are determined as of different dates or the fair value estimate reflects different assumptions from those in the appraisal. This may occur as a result of changes in market conditions and property use since the "as of" date of the appraisal.
19 For the agencies' regulations on real estate appraisals, refer to the following:
20 Refer to the Interagency Appraisal and Evaluation Guidelines, 75 Fed. Reg. 77450 (December 10, 2010).
An institution should collect and maintain data relevant to estimating lifetime expected credit losses21 that align with each method the institution will use to estimate its allowances for credit losses under CECL.22 The institution should begin by identifying currently available relevant data that should be maintained. The institution should then consider whether additional data may be relevant and therefore would need to be collected and maintained for a period sufficient to implement each method it has selected.
The agencies encourage institutions to discuss the availability of historical loss data internally with lending, credit risk management, information technology, and other functional areas and with their core loan service providers. System changes and other changes related to the collection and retention of data may be warranted. For example, depending on the estimation method or methods selected to implement CECL, institutions may need to capture additional data and retain data longer than they have in the past on loans and other financial assets that have been paid off or charged off.
Are there internal control considerations that management should address when gathering, maintaining, and using data needed to implement CECL? [April 2019]
Each institution should have internal controls and information systems that are appropriate to the size of the institution and the nature, scope, and risk of its activities that provide for, among other things, timely and accurate financial, operational, and regulatory reports.23
21 Lifetime expected credit losses means an estimate of expected credit losses over the entire contractual term of financial assets.
22 An institution may apply different estimation methods to different pools of financial assets. However, only one estimation method needs to be applied to each pool of financial assets.
23 See the Interagency Guidelines Establishing Standards for Safety and Soundness, which the banking agencies adopted pursuant to Section 39 of the Federal Deposit Insurance Act (12 U.S.C. 1831p-1). For national banks and federal savings associations, Appendix A to 12 CFR Part 30; for state member banks, Appendix D-1 to 12 CFR Part 208; for insured state nonmember banks and insured state savings associations, Appendix A to 12 CFR Part 364.
Debt SecuritiesShow
Does the accounting for credit losses on AFS debt securities change under the new accounting standard?24 [December 2016]
Yes. CECL requires an institution to measure expected credit losses upon the initial recognition of financial assets carried at amortized cost (e.g., loans HFI and HTM securities) and perform the credit loss assessment on such assets on a collective (pool) basis when similar risk characteristic(s) exist. In contrast, for AFS debt securities, the new accounting standard maintains the current requirement to assess credit losses at the individual security level only when the amortized cost of an AFS debt security exceeds fair value.25 In addition, AFS impairment is required to be measured using a discounted cash flow approach, whereas CECL does not specify a measurement approach.
24 This question does not address accounting for credit losses on a transferor's interests in securitized transactions accounted for as sales and purchased beneficial interests in securitized financial assets covered by the guidance in ASC Subtopic 325-40, Investments-Other-Beneficial Interests in Securitized Financial Assets. Refer to ASC 325-40-35-6A through 325-40-35-10A.
25 Refer to ASC 326-30-30-2, 326-30-35-1, 326-30-35-2, and 326-30-35-4 for additional information on this requirement.
Effective DatesShow
When does the new accounting standard take effect?26 [December 2016, updated April 2019]
For a PBE that is an SEC filer, as both terms are defined in U.S. GAAP, the new credit losses standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Thus, for an SEC filer that has a calendar year fiscal year, the standard is effective January 1, 2020, and it must first apply the new credit losses standard in its financial statements and regulatory reports (e.g., the Call Report) for the quarter ended March 31, 2020. An SEC filer is an entity that is required to file its financial statements with the SEC under the federal securities laws or, for an insured depository institution (IDI), the appropriate federal banking agency under section 12(i) of the Securities Exchange Act of 1934.27
For a PBE that is not an SEC filer, the credit losses standard is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Thus, for a PBE that is not an SEC filer and has a calendar year fiscal year, the standard is effective January 1, 2021, and the entity must first apply the new credit losses standard in its financial statements and regulatory reports (e.g., the Call Report) for the quarter ended March 31, 2021. A PBE that is not an SEC filer includes (1) an entity that has issued debt or equity securities that are traded, listed, or quoted on an over-the-counter (OTC) market, or (2) an entity that has issued one or more securities that are not subject to contractual restrictions on transfer and is required by law, contract, or regulation to prepare U.S. GAAP financial statements28 and make them publicly available periodically (e.g., pursuant to Section 36 of the Federal Deposit Insurance Act and Part 363 of the FDIC's regulations).
PBEs That Are SEC Filers Fiscal years beginning after 12/15/2019, including interim periods within those fiscal years 03/31/2020
*For institutions with calendar year ends fiscal years
26 Refer to ASC 326-10-65-1 for effective dates.
27 An SEC filer that qualifies as an emerging growth company (EGC), as defined in Section 2(a)(19) of the Securities Act of 1933, and has elected to take advantage of an extended transition period for complying with new or revised financial accounting standards should follow the non-PBE effective date for SEC and regulatory reporting purposes. The agencies do not take exception to an IDI that is a subsidiary of an electing EGC following the non PBE effective date for regulatory reporting purposes, regardless of whether the IDI meets the definition of a PBE at the IDI level.
28 The Consolidated Reports of Condition and Income (Call Report) filed by banks and savings associations, the 5300 Call Report filed by credit unions, and the Consolidated Financial Statements for Holding Companies (FR Y 9C) are not considered U.S. GAAP financial statements.
As of the new accounting standard's effective date, institutions will apply the standard based on the characteristics of financial assets as follows:29
Discuss the new accounting standard with the board of directors, audit committee, industry peers, external auditors,30 and supervisory agencies to determine how to best implement the new standard in a manner appropriate for the institution's size and the nature, scope, and risk of its lending and debt securities investment activities;
Identify currently available data that should be maintained and consider whether any additional data may need to be collected or maintained to implement CECL. Examples of types of data that may be needed to implement CECL include: origination and maturity dates, origination par amount, initial and subsequent charge-off amounts and dates, and recovery amounts and dates by loan; and cumulative loss amounts for loans with similar risk characteristics;31
Can an institution leverage its stress testing model(s) for CECL implementation purposes? [April 2019]
The agencies will not object to an institution leveraging its stress testing model(s) in the development of its models for CECL implementation purposes. However, there are significant differences in the underlying purpose and requirements of stress testing compared to those applicable to estimating expected credit losses under CECL. If an institution plans to use its stress testing model(s) as a building block in the development of its models for CECL implementation purposes, the institution should ensure that any modeling differences are identified and understood and that appropriate adjustments are made to the stress testing model(s). The institution should also ensure that the resulting adjusted model(s) that will be used to support its CECL estimation process are fit for the purpose of estimating allowances for credit losses under U.S. GAAP. If applicable, the institution also should consider the Supervisory Guidance on Model Risk Management.32
Will the agencies provide an approved formula or mandate a single approach for CECL implementation? [April 2019]
No. The agencies will not provide an approved formula or mandate a single approach that institutions must follow when estimating expected credit losses under CECL. Rather, as institutions plan for, adopt, and apply CECL, the agencies are closely monitoring interpretations of the new accounting standard and implementation practices. The objective of this monitoring is for the agencies to timely identify interpretations that depart from U.S. GAAP and practices within the range of U.S. GAAP that present safety and soundness concerns. As noted in the response to question "Will the agencies provide support to institutions?", the agencies are educating institutions through webinars and in-person events to assist institutions' management in implementing the standard.
29 Refer to ASC 326-10-65-1 for transition considerations.
30 When discussing the new accounting standard and its implementation with their external auditors, institutions and their audit committees should be mindful of applicable independence requirements.
31 Refer to the response to question "How should institutions segment HFI loan and HTM debt security portfolios under CECL?" for information on segmenting portfolios.
32 Refer to FRB Supervision & Regulation Letter 11-7, FDIC Financial Institution Letter 22-2017, and OCC Bulletin 2011-12.
MethodsShow
CECL does not prescribe the use of specific estimation methods.33 Rather, allowances for credit losses may be determined using various methods that reasonably estimate the expected collectability of financial assets and are applied consistently over time. For example, acceptable methods include loss rate, roll-rate, vintage analysis, discounted cash flow, and probability of default/loss given default methods. Neither a vintage nor a discounted cash flow method is required for estimating expected credit losses. Additionally, an institution may apply different estimation methods to different groups of financial assets. To properly apply an acceptable estimation method, an institution's credit loss estimates must be well supported.
33 Refer to ASC 326-20-30-3 for the use of measurement methods.
Off-Balance-Sheet Credit ExposuresShow
Will there be an allowance for credit losses on off-balance-sheet credit exposures under CECL?34 [December 2016]
34 Refer to ASC 326-20-30-11 and ASC 326-20-55-54 for Example 10: Application of Expected Credit Losses to Unconditionally Cancellable Loan Commitments.
Public Business EntitiesShow
A PBE is a business entity that meets any one of five criteria set forth in the "Glossary" of the new credit losses standard. The FASB originally established the PBE definition for use in specifying the scope of future financial accounting and reporting guidance through ASU No. 2013-12, Definition of a Public Business Entity, in December 2013. As it relates to the implementation of the new credit losses standard, PBE status affects the effective date applicable to the institution as discussed in the response to question "When does the new accounting standard take effect?." Additionally, the new credit losses standard requires institutions that are PBEs to disclose credit quality indicators by vintage.35
The determination of whether an institution is a PBE is the responsibility of each institution's management. Institutions are encouraged to review the responses to the other questions in this section in making this determination.
Although all SEC filers are considered PBEs, not all PBEs meet the definition of an SEC filer. Since the FASB set different effective dates for PBEs that meet the definition of an SEC filer and PBEs that do not meet the definition of an SEC filer, determining whether an institution is an SEC filer is an important first step in planning for implementation of the new credit losses standard.36
A PBE is considered an SEC filer if it is required to file or furnish its financial statements with either of the following:37
Therefore, an IDI that is required to file its financial statements with the appropriate federal banking agency under Section 12(i) of the Securities Exchange Act of 1934 is considered an SEC filer.38
The inclusion of the financial statements of an institution that is not otherwise an SEC filer in a submission by another SEC filer does not cause the institution to be considered an SEC filer.39
Yes, an institution that is not an SEC filer can be considered a PBE. To determine whether an institution that is not an SEC filer is a PBE, the institution must evaluate the following criteria and conclude that it meets at least one of these criteria:40
It is not required by the SEC to file or furnish financial statements, but does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).41
It has issued securities that are traded, listed, or quoted on an exchange or an OTC market.42
It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements43 (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). An institution must meet both of these conditions to meet this criterion.
What is meant by "contractual restrictions on transfer" as used in the second and fourth criteria listed in the response to the question "When does the new accounting standard take effect?" [September 2017]
The bank subsidiary is not an SEC filer and does not meet the first two criteria listed in the response to the question "When does the new accounting standard take effect?."
The bank subsidiary has no other debt or equity securities outstanding that would cause it to meet the last two criteria listed in the response the question "When does the new accounting standard take effect?."
The holding company would be considered a PBE under the third criterion listed in the response to the question "When does the new accounting standard take effect?" because it has issued common stock that trades on an OTC market. Therefore, the holding company's consolidated financial statements would be required to be prepared using accounting standards and effective dates applicable to PBEs..
The bank subsidiary would not be a PBE under any of the criteria because an implicit contractual restriction on transfer exists for its issued securities, which are 100 percent owned by its parent holding company. The subsidiary should not "look through" to the holding company, even if the holding company's only significant asset is its investment in the bank subsidiary. Therefore, the bank subsidiary would be able to use the effective date of the new credit losses standard for entities that are not PBEs when it prepares its regulatory reports (e.g., the Call Report) and stand-alone U.S. GAAP financial statements, if applicable. Additionally, if the bank subsidiary, as a non-PBE, prepares stand-alone U.S. GAAP financial statements, the bank subsidiary has the option to disclose credit quality indicators by vintage, but is not required to do so.44
Notwithstanding the effective date of the new credit losses standard that applies to the bank subsidiary's regulatory reports and stand-alone financial statements, if applicable, the subsidiary must provide financial information to the holding company for the purposes of the holding company's consolidated financial statements based on the standard's effective date and disclosure requirements that apply to a PBE that is not an SEC filer. Therefore, it may be advisable for the bank subsidiary to elect to early adopt the new credit losses standard for its regulatory reports and stand-alone financial statements, if applicable, at the same time that the holding company adopts the standard because the bank would need to be able to provide this information to the holding company for the holding company's consolidated financial reporting.45
The institution would not be required to "look through" the VIE for the purposes of determining whether the institution is a PBE. However, the institution should evaluate whether it meets any of the criteria in the definition of a PBE listed in the response to the question "When does the new accounting standard take effect?" on a stand-alone basis. For example, the debt securities issued by the institution that are owned by the VIE need to be evaluated under the fourth criterion in the response to the question. The agencies would expect the institution to conclude that the debt securities have an implicit contractual restriction on transfer if 100 percent of the debt securities are held by the VIE that issued the trust preferred securities. In that situation, the VIE could not sell the debt securities it holds without the involvement of the management of the institution. The institution would also need to determine whether it is required to periodically prepare financial statements and make them publicly available, the second condition in the fourth criterion in the response to the question. Both conditions must be met for the institution to be a PBE.
Is an insured depository institution that is subject to Section 36 of the Federal Deposit Insurance Act and Part 363 of the FDIC's regulations, "Annual Independent Audits and Reporting Requirements" (commonly referred to as the FDICIA requirement), considered a PBE? [September 2017]
The fact that an IDI is subject to the FDICIA requirement46 does not in and of itself mean the IDI is a PBE. An IDI subject to the FDICIA requirement that is not an SEC filer would need to evaluate each criterion in the definition of a PBE listed in the response to the question "When does the new accounting standard take effect?" to determine whether it is a PBE. If the IDI is a subsidiary of a holding company, the IDI and the holding company should separately evaluate each of the PBE criteria to determine whether each entity is a PBE.
For example, assume an IDI subject to the FDICIA requirement is not an SEC filer and does not meet any of the first three criteria listed in the response to the question. The final criterion in that response includes two conditions, both of which must be met for the IDI to be a PBE. These conditions are:
An IDI subject to Section 36 and Part 363 is required to prepare audited annual U.S. GAAP financial statements, which the IDI must include in a report that it files with the FDIC, its primary federal regulator (if other than the FDIC), and the appropriate state banking regulator (if applicable). The IDI must make this report, including the U.S. GAAP financial statements, publicly available. Thus, an IDI subject to the FDICIA requirement meets the second condition in the criterion above47 and needs to determine if it meets the first condition in that criterion to conclude whether it is a PBE.
When an IDI is subject to Section 36 and Part 363, the IDI's only securities outstanding are common stock, and the IDI is not an SEC filer, the IDI should consider whether contractual restrictions on transfer exist on its common stock. If the common stock of the IDI is wholly owned by a holding company, an implicit restriction on the transfer of the IDI's common stock is presumed to exist. Therefore, the IDI would not meet the first condition in the criterion above, and, thus, the IDI is not a PBE. If there is no holding company or the holding company owns less than 100 percent of the IDI's common stock, and the IDI determines that no contractual restrictions on transfer exist on its common stock, the IDI would be a PBE under the final criterion listed in the response to the question "When does the new accounting standard take effect?," as it meets both conditions under that criterion (i.e., conditions 1 and 2 above).
35 Refer to the response to the question "What does the new accounting standard change in existing U.S. GAAP" and, in particular, footnote 7.
36 The standard also provides transition relief with regard to disclosure of vintage-based credit quality indicators for PBEs that are not SEC filers. Refer to ASC 326-10-65-1(h).
37 Refer to the "Glossary" section of ASC 326-10 for the definition of SEC filer.
38 Section 36 of the Federal Deposit Insurance Act and Part 363 of the FDIC's regulations, "Annual Independent Audits and Reporting Requirements" (commonly referred to as the FDICIA requirement), are not part of the Securities Exchange Act of 1934 or the rules promulgated thereunder. Therefore, the FDICIA requirement to prepare and make U.S. GAAP financial statements publicly available on a periodic basis does not cause an IDI to be considered an SEC filer under the second criterion included in the response to this question.
39 Refer to the "Glossary" section of ASC 326-10 for the definition of SEC filer.
40 Refer to the "Glossary" section of ASC 326-10 for the definition of PBE.
41 An entity may meet the definition of a PBE solely because its financial statements or financial information is included in another entity's filing with the SEC. In that case, the entity is only a PBE for purposes of financial statements that are filed or furnished with the SEC. Refer to the response to question "When an institution is determining its PBE status, must it consider securities outstanding at the parent holding company level, or should the PBE determination be made individually for each entity within an organizational structure?" for further detail.
42 For purposes of this criterion and the next criterion, "securities" include both debt and equity securities.
43 The Call Report filed by banks and savings associations, the 5300 Call Report filed by credit unions, and the Consolidated Financial Statements for Holding Companies (FR Y-9C) are not considered U.S. GAAP financial statements.
44 Although vintage disclosures would not be required, the bank subsidiary would be required to disclose the information specified in ASC 326-20-50-5 on credit quality indicators in its stand-alone U.S. GAAP financial statements.
45 Early application of the new credit losses standard is permitted for all institutions for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
46 The FDICIA requirement applies to an IDI with $500 million or more in consolidated total assets as of the beginning of its fiscal year. The FDICIA requirement does not apply directly to holding companies, but an IDI can satisfy the audited financial statement requirement of Section 36 and Part 363 at the consolidated holding company level if certain conditions are met.
47 Even if the IDI satisfies the audited financial statement requirement of Section 36 and Part 363 at the consolidated holding company level, the IDI meets the second condition in this criterion because the IDI is the entity subject to the requirement to prepare and make publicly available U.S. GAAP financial statements.
Purchased Credit-Deteriorated Financial AssetsShow
In addition, the definition of PCD assets is broader than the definition of PCI assets in current accounting standards. The new accounting standard defines "purchased financial assets with credit deterioration" as "acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer's assessment."48
For example, assume that Bank A pays $750,000 for a loan with an unpaid principal balance of $1 million.49 The loan will be HFI and measured on an amortized cost basis. At the time of purchase, Bank A estimates the allowance for credit losses on the unpaid principal balance to be $175,000.
Loan (HFI) - Unpaid principal balance $1,000,000
Loan (HFI) - Noncredit discount $75,000
For example, continuing the example in the response to the question "How should institutions account for PCD financial assets under CECL?," Bank A paid $750,000 for a loan classified as HFI with an unpaid principal balance of $1 million. Bank A determined that the loan qualified as a PCD financial asset. At the purchase date, Bank A estimated the allowance for credit losses on the unpaid principal balance was $175,000, and the noncredit discount on the loan was $75,000.
Assume that at the end of the following quarter, Bank A reevaluates the expected credit losses on the loan and estimates that the allowance for credit losses on this PCD financial asset should be $200,000.50 Further assume this PCD financial asset does not share risk characteristics with other financial assets.
Now assume that at the end of the next quarter, Bank A again reevaluates the expected credit losses on the loan and estimates that the allowance for credit losses should be $190,000, a decrease of $10,000 from the allowance at the end of the previous quarter.51
The journal entry to record the change in the allowance at the end of this quarter is as follows:52
48 Refer to the "Glossary" section of ASC 326.
49 Refer to ASC 326-20-55-61 through 326-20-55-65 for Example 12: Recognizing Purchased Financial Assets with Credit Deterioration.
50 The PCD financial asset was not deemed uncollectible in this period.
51 The PCD financial asset was not deemed uncollectible in this period.
52 If at a future date, Bank A reevaluates the expected credit losses on the loan and estimates the allowance for credit losses should be less than the Day 1 estimate of $175,000, the journal entry to record the change in the allowance also would be recorded as a credit to the provision for credit losses.
Qualitative FactorsShow
Historical loss information will generally provide an appropriate starting point for an institution's assessment of expected credit losses. The new credit losses standard acknowledges that, because historical experience may not fully reflect an institution's expectations about the future, the institution should adjust historical loss information, as necessary, to reflect the current conditions and reasonable and supportable forecasts not already reflected in the historical loss information. To adjust historical credit loss information for current conditions and reasonable and supportable forecasts, the institution should continue to consider all significant factors relevant to determining the expected collectability of financial assets as of each reporting date. The new accounting standard provides examples of factors an institution may consider.53 Depending on the nature of the asset, not all of the factors may be relevant and other factors also may be relevant and should be considered. The agencies believe the qualitative or environmental factors identified in the December 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses should continue to be relevant under CECL and are covered by the examples of factors that may be considered under the new credit losses standard.
53 Refer to ASC 326-20-55-4 for the examples. The examples of factors are not intended to be all-inclusive.
Reasonable and Supportable ForecastsShow
Should an institution subject to stress testing requirements under the Dodd-Frank Act (DFAST) or the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) align its reasonable and supportable forecast period for U.S. GAAP financial and regulatory reporting with the nine-quarter planning horizon used in the stress testing process? [April 2019]
Does the baseline macroeconomic scenario published by the Federal Reserve for stress testing purposes signify the Federal Reserve's or the agencies' view of the forecast of future economic conditions and thus represent an appropriate reasonable and supportable forecast to use for CECL? [April 2019]
No. The Federal Reserve's Policy Statement on the Scenario Design Framework for Stress Testing states that the stress test scenarios, including the baseline macroeconomic scenario, "should not be regarded as forecasts; rather, they are hypothetical paths of economic variables that will be used to assess the strength and resilience of the companies' capital in various economic and financial environments."54 In contrast, the forecasts used for estimating expected credit losses under CECL should incorporate economic variables and other factors relevant to the collectability of an institution's portfolios based on management's expectations.
54 Refer to 12 CFR Part 252, Appendix A.
Regulatory CapitalShow
Will adoption of the new accounting standard impact U.S. GAAP equity and regulatory capital? [December 2016, updated April 2019]
Yes. Upon initial adoption, the earlier recognition of credit losses under CECL will likely increase allowance levels and lower the retained earnings component of equity, thereby lowering common equity tier 1 capital for regulatory capital purposes.55
However, the actual effect of CECL upon implementation will vary by institution and depend on many factors, such as those identified in the response to the question "Will the agencies establish benchmarks or floors for allowance levels?," and the effect of these factors on the collectability of an institution's HFI loans and HTM debt securities upon adoption.
55 For credit unions, implementation of CECL will impact retained earnings and will likely lower regulatory net worth. However, it will not impact the measurement under the NCUA's risk-based capital rule that becomes effective in 2020. Under this new rule, the entire allowance balance will be reflected in capital for purposes of the new risk-based capital calculation.
Regulatory ReportsShow
For an institution with a calendar fiscal year that is not a PBE and has not elected early adoption, how and when should the new credit losses standard be incorporated into the institution's Call Report? [September 2017, updated April 2019]
The institution must estimate its allowances for credit losses on loans HFI, HTM debt securities, and other on-balance-sheet financial assets within the scope of ASC 326-20, and its liabilities for credit losses on off-balance-sheet credit exposures within the scope of ASC 326-20 by applying the new credit losses standard to these assets and exposures as of January 1, 2022.61
The institution must then calculate the difference between its allowances and liabilities for credit losses measured in accordance with the new credit losses standard as of January 1, 2022, and the allowances and liabilities for these exposures reported on its Call Report balance sheet as of December 31, 2021, that were measured based on U.S. GAAP in effect on that date (i.e., the incurred loss methodology).62 The sum of these differences, net of applicable income taxes, is the "cumulative-effect adjustment" as of the effective date of the new credit losses standard.
The cumulative-effect adjustment is recognized as an adjustment to the beginning balance of retained earnings as of January 1, 2022.63
The amounts necessary to adjust the balances of the allowances and liabilities for credit losses to the March 31, 2022, estimated amounts should be reported as credit loss expenses in the Call Report income statement for March 31, 2022.59 The amounts reported as expenses should take into consideration the initially estimated balances of the allowances and liabilities as of January 1, 2022, as measured under the new accounting standard. The amounts reported as expenses should also incorporate the activity (e.g., charge-offs and recoveries) affecting the allowances and liabilities during the first calendar quarter of 2022.
Can you provide a numerical example illustrating the response to the previous question (i.e., for an institution with a calendar year fiscal year that is not a PBE, how and when should the new credit losses standard be incorporated into its Call Reports)? [September 2017, updated April 2019]
Included in this response for illustrative purposes is a numerical example of the response to the previous question. This example considers only the impact of initially applying CECL to loans HFI and not to other financial assets and off-balance-sheet credit exposures within the scope of ASC 326-2060
The institution calculates the difference between its allowance for credit losses on loans HFI under CECL as of January 1, 2022, and its allowance for loan and lease losses on these same loans under current U.S. GAAP as of December 31, 2021, to be $50,000 ($200,000 minus $150,000). The $50,000 difference, net of applicable income taxes, is recognized as an adjustment to the January 1, 2022, beginning balance of retained earnings in the first quarter 2022 Call Report. The institution then will recognize a $55,000 provision for credit losses for the first three months of 2022 as calculated under CECL61 to bring the allowance for credit losses under CECL to $235,000 as of March 31, 2022.
Allowance for loan and lease losses (under the incurred loss methodology) $150,000
Cumulative-effect adjustment to the January 1, 2022, beginning balance of retained earnings (ignoring applicable tax effect, if any) $50,000
Charge-offs, net of recoveries (year-to-date) $20,000
Provision for credit losses (year-to-date) (under CECL) $55,000
Provision for credit losses on loans HFI $55,000
Allowance for credit losses on loans HFI $55,000
How and when must an institution that is a PBE with a non-calendar fiscal year (e.g., a September 30 fiscal year end), but is not an SEC filer, incorporate the new credit losses standard into its regulatory reports? [September 2017]
As stated in the response to the question "When does the new accounting standard take effect?," a PBE that is not an SEC filer must apply the new credit losses standard in its financial statements and regulatory reports (e.g., the Call Report) for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. In this example of an institution that is a PBE but is not an SEC filer, the institution's fiscal year begins October 1, 2021. Thus, it must begin to apply the new credit losses standard as of that date. The institution must continue to apply current U.S. GAAP (i.e., the incurred loss methodology) in its financial statements, if applicable, and regulatory reports (e.g., the Call Report) for March 31, 2021; June 30, 2021; and September 30, 2021. This means the Call Reports for the first three calendar quarters of 2021 for a PBE with a September 30 fiscal year-end that is not an SEC filer will not reflect any adjustments for the new credit losses standard.
Such a PBE must first apply the new credit losses standard in its interim period financial statements, if applicable, and in its Call Report for the quarter ended December 31, 2021. The institution must estimate its allowances for credit losses on on-balance-sheet financial assets within the scope of ASC 326-20 and its liabilities for credit losses on off-balance-sheet credit exposures within the scope of ASC 326-20 by applying the new credit losses standard to these assets and exposures as of October 1, 2021.62 The cumulative-effect adjustment to retained earnings as of October 1, 2021, is the sum of the differences, net of applicable income taxes, between its allowances and liabilities for credit losses measured in accordance with CECL as of that date and the allowances and liabilities for these assets and exposures reported on its Call Report balance sheet as of September 30, 2021, that were measured based on U.S. GAAP in effect on that date.63 The cumulative-effect adjustment to retained earnings as of October 1, 2021, would be reported in the changes in equity capital schedule of the Call Report for December 31, 2021.
56 The new credit losses accounting standard's CECL methodology applies to all financial instruments carried at amortized cost (including loans HFI and HTM debt securities, as well as trade and reinsurance receivables and receivables that relate to repurchase agreements and securities lending agreements), a lessor's net investments in leases, and off-balance-sheet credit exposures not accounted for as insurance (including loan commitments, standby letters of credit, and financial guarantees). The new credit losses standard also modifies the accounting for impairment on AFS debt securities.
57 The calculation of this difference would exclude amounts by which the balance sheet amounts of financial assets identified as PCD as of January 1, 2022, have been grossed up by the amount of their allowances for expected credit losses as of that date.
58 AFS and HTM debt securities on which other-than-temporary impairment had been recognized prior to the effective date of the new credit losses standard will transition to the new credit losses standard on a prospective basis with respect to such impairment (i.e., with no cumulative-effect adjustment for prior other-than-temporary impairment recognized as an adjustment to the beginning balance of retained earnings as of January 1, 2022). Financial assets classified as PCD as of the effective date, including those assets previously classified as PCI, will also transition to the new credit losses standard with no cumulative-effect adjustment. Refer to the response to the question "How should an institution apply the new accounting standard upon initial adoption?."
59 Provisions for credit losses on off-balance-sheet credit exposures are included as other noninterest expense in the Call Report income statement.
60 The dollar amounts used in this example are for illustrative purposes only and are not intended to represent the amount by which an institution's allowance for credit losses may increase upon initially applying CECL. As stated in the response to the question "Will the agencies establish benchmarks or floors for allowance levels?, "At the time of adoption, the actual impact of CECL on an institution's allowance levels will depend on many factors. These factors include current and future expected economic conditions, the level of an institution's allowance balances, its portfolio mix, its underwriting practices, and its geographic locations and those of its borrowers."
61 The provision for credit losses for the full 12 months of 2021 under CECL equals the difference between (1) the allowance for credit losses of $235,000 under CECL as of December 31, 2021, and (2) the allowance for credit losses of $200,000 under CECL as of January 1, 2021, minus the net charge-offs of $85,000 for the full 12 months of 2021. The table below provides a rollforward of the allowance for credit losses from December 31, 2020, through December 31, 2021, to illustrate the amount of the provision for credit losses for the full 12 months of 2021 under CECL.
Allowance for loan and lease losses (under the incurred loss methodology) as of December 31, 2021 $150,000
Change in the balance of the allowance for loan and lease losses as of December 31, 2021, to the initial balance of the allowance for credit losses on loans HFI upon adoption of CECL 50,000
Allowance for credit losses on loans HFI (under CECL) as of January 1, 2022 $200,000
Charge-offs, net of recoveries (year-to-date) (20,000)
Provision for credit losses (year-to-date) (under CECL) 55,000
Allowance for credit losses on loans HFI (under CECL) as of March 31, 2022 $235,000
62 See footnote 51.
63 See footnotes 52 and 53, except that for this example of a PBE with a September 30 fiscal year-end that is not an SEC filer, the beginning balance of retained earnings is as of October 1, 2021.
SegmentationShow
CECL requires institutions to measure expected credit losses on financial assets carried at amortized cost on a collective or pool basis when similar risk characteristics exist. Similar risk characteristics may include one or a combination of the following:64
In addition to the examples of similar risk characteristics listed in the response to the question "How should institutions segment HFI loan and HTM debt security portfolios under CECL?," are there segmentation factors specific to credit cards that an institution should consider when estimating credit losses on HFI credit card loans under CECL? [April 2019]
64 Refer to ASC 326-20-55-5. The list of risk characteristics is not intended to be all inclusive.
Supervisory ExpectationsShow
During the early part of the implementation phase for the new accounting standard, examiners may begin discussing the status of an institution's implementation efforts.67 Throughout the implementation phase, examiners will tailor their expectations based on the size and complexity of the institution and the effective date of the new accounting standard applicable to the institution. In doing so, examiners will be mindful of the scope and scale of changes necessary for each institution to make a good faith effort to achieve a sound and reasonable implementation of the new accounting standard. For further information on planning and preparing for the new accounting standard, including examples of initial implementation efforts, refer to the response to the question "What should institutions do to prepare for the implementation of CECL?."
Until CECL's effective date, the agencies will continue to examine credit loss estimates and allowance balances using examination procedures applicable to determining whether the institution has implemented an incurred credit loss methodology consistent with existing U.S. GAAP and regulatory reporting instructions. The guidance in the December 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses, and the agencies' policy statements on allowance methodologies and documentation remains relevant.68
In the Joint Statement issued on June 17, 2016, and in the response to the question "What should institutions do to prepare for the implementation of CECL?," the agencies used the term "smaller and less complex" when discussing the scalability of CECL. How do the agencies define "smaller and less complex?" [April 2019]
Are there concepts, processes, or practices detailed in existing supervisory guidance on the ALLL that will continue to remain relevant under CECL? [April 2019]
Yes. While updated supervisory guidance on the allowance for credit losses (ACL) will be forthcoming, many concepts, processes, and practices detailed in existing supervisory guidance on the ALLL will continue to remain relevant under CECL. This includes, but is not limited to, information related to management's responsibility for the allowance estimation process, the board of directors' responsibility for overseeing management's process, and the need for institutions to appropriately support and document their allowance estimates. Additional concepts from the ALLL policy statements that remain relevant are included in the responses to other questions within this document (e.g., segmentation considerations in the response to the question "How should institutions segment HFI loan and HTM debt security portfolios under CECL?" and qualitative factors in the response to the question "Are qualitative factors still relevant under CECL?").
67 The implementation phase is the period from the issuance of the final standard to its adoption date by an institution.
68 See footnote 4.
Third-Party VendorsShow
The agencies will not require institutions to engage third-party service providers to assist management in calculating allowances for credit losses under CECL. If an institution chooses to use a third-party service provider to assist management with this process, the institution should engage in sound third-party risk management. Management should refer to the agencies' guidance on third-party service providers.69
69 For the agencies' guidance on third-party service providers, refer to the following:
OCC, Bulletin 2013-29, "Third-Party Relationships: Risk Management Guidance"; Bulletin 2017-7, "Third Party Relationships: Supplemental Examination Procedures"; Bulletin 2017-21, "Third Party Relationships: Frequently Asked Questions to Supplement OCC Bulletin 2013-29"
Troubled Debt RestructuringsShow
Appendix - ResourcesShow
Joint Statement on the New Accounting Standard on Financial Instruments – Credit Losses (PDF)
1 See a complete copy of ASU 2016-13.
2 Original FAQs were published on December 19, 2016. Additional FAQs were added on September 6, 2017.
3 For information on the meaning of PBEs and non-PBEs, refer to the response to the question "When does the new accounting standard take effect?"4. Institutions are also encouraged to review the responses to the questions in the section "Public Business Entities" when determining whether they are PBEs.
4 Refer to the Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions issued by the FRB, the FDIC, and the OCC in July 2001 and to Interpretative Ruling and Policy Statement 02-3, Allowance for Loan and Lease Losses Methodologies and Documentation for Federally Insured Credit Unions, issued by the NCUA in May 2002.
5 Refer to the response to the question "When does the new accounting standard take effect?" for information on effective dates.
05/08/2020 OCC 2020-49 Current Expected Credit Losses: Final Interagency Policy Statement on Allowances for Credit Losses
04/22/2020 OCC 2020-42 Current Expected Credit Losses: Final Rule With Technical Changes to Interim Final Rule
03/31/2020 OCC 2020-30 Regulatory Capital: Joint Statement on the Interaction of the Revised Transition of the CECL Methodology for Allowances With Section 4014 of the CARES Act