The Financial Accounting Standards Board and the International Accounting Standards Board are jointly proposing new standards for accounting of ALLL and Other Than Temporary Impairment of debt securities (OTTI) called the Current Expected Credit Loss model (“CECL”). The proposal is intended to address the overstatement of assets caused by delayed recognition of credit losses under existing standards, which recognize a credit loss that is probable or has already incurred. The CECL model, which applies to loans, debt securities, lease receivables, loan commitments, and other receivables, requires banks to impair existing financial assets on the basis of current estimates of contractual cash flows not expected to be collected. Estimates would be based on past events, current conditions, and forecasts.

The CECL model focuses on recording “life of loan” (“LOL”) losses as of loan origination, which would require banks to make forecasts far beyond their capability. Because CECL is unrelated to how banks manage credit losses, it would require significant changes to the systems that banks currently use to estimate credit losses. As a result, bankers would be producing estimates that are unreliable to users of financial disclosures and also inconsistent with current regulatory standards.

Bankers are requested to send comments as soon as possible to FASB urging it to continue working with bankers, investors, regulators, and auditors to improve the proposal.

CBA has prepared a sample comment letter for you to use as well as a background document on the issue. If this proposal affects your bank, your voice is important.