The FASB has proposed an Accounting Standards Update on credit losses that will require every community bank in the country to revise the way they account for their loan loss reserve and the way they account for their securities. The ICBA outlined the ramifications of these new updates and is encouraging banks to sign a petition requesting that the FASB re-propose a simpler plan.
According to the FASB the new standards will include the following:
- The Office of the Comptroller of the Currency estimates that loan loss reserves on average will increase by 30-50% with adoption of the proposed expected credit loss model with the impact on some banks much greater.
- Single approach for recognizing credit losses on loans, securities and trade receivables.
- Establishes an expected credit loss model based on the bank’s own expectations.
- Bank estimates “life of instrument” expected credit losses using forward looking information and recognizing the net present value of those losses at origination.
- Estimates of loss are maintained based on historical losses for similar assets, current economic conditions and future management expectations based on forecasts
- Replaces the incurred loss model, which has been criticized as contributing to the recent financial crisis through the delayed loss recognition of expected credit loss events.
ICBA has outlined its concerns with these new standards. They have made their own proposal that they feel would simplify the Accounting Standards for community banks and make them more cost effective. They are asking for all those in the community banking industry to sign a petition to encourage the FASB to consider their alternative recommendations.
To read the entire article and sign the petition, please visit ICBA.org.