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FASB Adopts New Rule for Banks' Calculation of Loan Losses

Publisher: Day Pitney Alert
June 17, 2016
Day Pitney Author(s) Robert M. Taylor III

On June 16, the Financial Accounting Standards Board (FASB) issued a final accounting rule that provides for different financial reporting of loan losses. The new rule will require banks to record all losses they project over the life of their loans when these loans are initially booked. This is in sharp contrast to the current rule, which requires banks to record losses only when there is evidence that a loss has actually occurred. As a result of this change, banks are likely to be forced to increase their loan loss reserves by increasing their allowance for loan losses. In doing so, banks' profits could be adversely affected upon the implementation of the rule. Banks which have acquired impaired loan portfolios in an acquisition, or otherwise, have taken on the task of predicting future losses expected to be incurred to maturity but generally without impacting the loan loss reserve.  

For public companies that are SEC filers, the new final rule will be effective for fiscal years beginning after December 15, 2019 (and interim periods within those fiscal years). For other public companies that do not meet the definition of an SEC filer, they will need to comply with the new final rule for fiscal years beginning after December 15, 2020 (and interim periods within those fiscal years). FASB provided an additional year for implementation to non-SEC filers because they are generally more resource constrained than SEC filers. We believe that other public companies that are non-SEC filers refer to banks whose securities are registered with bank regulatory agencies (such as the OCC or the FDIC) or banks whose securities are traded in the over-the-counter market and not registered with the SEC. For privately held companies, the new final rule becomes effective for annual periods beginning after December 15, 2020, and interim periods within fiscal years beginning after December 31, 2021. Early adoption is permitted for any entity for fiscal years beginning after December 15, 2018 (and interim periods within those fiscal years). 

Community banks, especially smaller community banks, have argued that compliance with the new methodology for calculating loan losses could prove costly and burdensome as they may have to invest in expensive and complex computer models in order to project future loan losses. To alleviate these banks' concerns, the FASB has stated that community banks can rely on methodologies already at their disposal to make projections of future loan losses. 

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