Current Expected Credit Losses: Additional and Updated Interagency Frequently Asked Questions on the New Accounting Standard on Financial Instruments–Credit Losses

In November 2019, the FASB issued ASU No. 2019-10, "Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates." This ASU delayed the effective date of Topic 326 to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, for all institutions, except U.S. Securities and Exchange Commission (SEC) filers, as that term is defined in U.S. generally accepted accounting principles, that are not eligible to be smaller reporting companies as defined by the SEC. The responses to the "Frequently Asked Questions" issued on April 3, 2019, have not yet been updated. Institutions should consider this delayed effective date when reviewing the responses to questions 3, 4, 28, and 34 through 36.

Summary

The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the National Credit Union Administration (collectively, the agencies) are publishing additional frequently asked questions (FAQ) to assist financial institutions and examiners with the new accounting standard, Accounting Standards Update (ASU) 2016-13, Topic 326, “Financial Instruments–Credit Losses” (ASU 2016-13), issued by the Financial Accounting Standards Board (FASB) on June 16, 2016. The agencies published 23 FAQs on December 19, 2016, and published 14 additional questions on September 6, 2017. Today, the agencies are publishing nine additional questions, updating responses to four existing questions, and adding an appendix with links to relevant resources that are available to banks to assist with implementation of the current expected credit losses methodology (CECL).

ASU 2016-13 introduces CECL for estimating allowances for credit losses. The effective date of ASU 2016-13 depends on the financial institution’s characteristics. For U.S. Securities and Exchange Commission filers, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

Rescissions

This bulletin rescinds the following:

• OCC Bulletin 2016-45, “Current Expected Credit Losses: Interagency Frequently Asked Questions on the New Accounting Standard on Financial Instruments–Credit Losses.”
• OCC Bulletin 2017-34, “Additional Interagency Frequently Asked Questions on the New Accounting Standard on Financial Instruments—Credit Losses.”

Highlights

The nine additional FAQs address

• consideration of stress testing models, scenarios, and forecast periods when forecasting future economic conditions for CECL.
• accounting implementation issues related to
  • expected future changes in collateral when using the collateral-dependent practical expedient.
  • borrower payment behaviors as a risk characteristic for credit card portfolios.
• internal control considerations for CECL implementation.
• clarification of the agencies’ use of the term “smaller and less complex” related to the scalability of CECL.
• concepts in existing interagency policy statements related to the allowance for loan and lease losses that remain relevant. These interagency policy statements include the December 2006 “Interagency Policy Statement on the Allowance for Loan and Lease Losses” (conveyed by OCC Bulletin 2006-47)¹ and the July 2001 “Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions” (conveyed by OCC Bulletin 2001-37).²

The four updated responses

• pertain to existing questions 4, 18, 34, and 35.
• reflect the new effective date for nonpublic business entities as announced in the FASB’s issuance of ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses,” issued in November 2018, and reflect the final rule that modifies regulatory capital rules.

The appendix in the interagency FAQs contains links to resources, including the agencies’ resources and webinars, the FASB’s Transition Resource Group web page, and the FASB’s Staff Q&A “Topic 326: No. 1: Whether the Weighted-Average Remaining Maturity Method Is an Acceptable Method to Estimate Expected Credit Losses,” issued in January 2019, on the use of the weighted average remaining maturity (WARM) method and illustrative examples of WARM in accordance with CECL.

Further Information

Refer to BankNet for additional resources, including the OCC’s CECL Call Report Effective Date Decision Tree; the OCC’s CECL Webinar Series; the OCC’s CECL Roadmap: Implementation Considerations; and Topic 12, “Credit Losses,” of the OCC’s Bank Accounting Advisory Series.

Please contact the OCC at CECL@occ.treas.gov with CECL questions. For questions about this bulletin, contact Joy Palmer, Deputy Chief Accountant, or Sarah Nawrocki, Professional Accounting Fellow, Office of the Chief Accountant, at (202) 649-7076.

Grovetta N. Gardineer
Senior Deputy Comptroller for Bank Supervision Policy

Related Links

• “Frequently Asked Questions on the New Accounting Standard on Financial Instruments—Credit Losses” (PDF)
• Bank Accounting Advisory Series (PDF)