The Financial Accounting Standards Board (FASB) at their December 17, 2013, meeting voted 5-2 to continue with the December 2012 Proposed Accounting Standards Update (ASU) No. 2012-260, Financial Instruments - Credit Losses (Subtopic 825-15). The FASB had been working with the International Accounting Standards Board (IASB) on a converged asset impairment model. The FASB vote likely ends any convergence of accounting standards between the FASB and IASB on the issue.

CECL Final Standard Expected in First Half of 2014

As a result of the FASB's decision, the model known as "Current Expected Credit Losses" or CECL will be moved along for a final standard in the first half of 2014. The CECL model will require banks and other financial institutions to forecast all foreseeable losses on loans and set aside appropriate reserves. This includes losses on all types of assets and does not differentiate between healthy loans and those loans that have experienced credit deterioration.

Strong Resistance Still Expected to CECL Final Issuance

The proposed ASU was the result of what regulators and investors considered the biggest accounting problem to emerge from the 2008 financial crisis - recognition of losses on failing loans after the loans have experienced credit deterioration. Investors indicated that a change in the accounting for credit losses was needed, as they believed that the financial crisis revealed that the current accounting standards addressing credit losses provided too little information and was too late to be of use to investors and regulators.

However, the proposed ASU has received significant objections from banks and other financial institutions in that they believe the proposed ASU overreacts to the financial crisis requiring them to tie up too much of their capital in reserves. Additionally, banks and other financial institutions have voiced their concerns on the difficulties in calculating the expected lifetime losses on the day they originate a loan. Auditors have also criticized the proposed ASU indicating that the forecasting of all foreseeable losses would be too judgmental and difficult to verify.

Although the FASB has indicated they will continue to refine the proposed ASU, strong resistance is expected as the proposed ASU moves toward final issuance.

For further information regarding the proposed ASU, please contact your local Eide Bailly professional.