New Loan Impairment Standard Will Affect More Than Big Banks –and that’s what some in Congress worry about
The Financial Accounting Standards Board (FASB) issued its Current Expected Credit Loss (CECL) standard on June 16, 2016. Implementation is scheduled to begin this December.
The new standard affects more than banks. It will hit a broad part of the business sector that engages in lending, big and small.
CECL replaces the current GAAP impairment model which is based on incurred losses, and where investments are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms.
Instead, under CECL, a lender will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss from inception and continuing over the life of a loan.
Although the focus has centered on how this major change will affect the financial services industry, the new standard will also affect companies that hold financial instruments. It applies to financial assets at amortized cost, including loans, reinsurance and trade receivables, held-to-maturity (HTM) debt securities, impairment model for available-for-sale debt securities, net investment in leases, and certain off-balance-sheet credit exposures, such as loan commitments.
Under CECL expected losses must be estimated and recorded upfront and then reviewed and measured again at each reporting period. Companies will have to make a judgment call on choosing which model and methodology to use, and then make more judgment calls in selecting which data is relevant to arrive at a reasonable and supportable forecast.
Although intended to bring greater transparency and avoid surprise debt write-offs, it is a lot to ask of companies outside the financial banking sector, according to Weinberg’s Firm Managing Partner, Corey Fischer.
“Companies will be required to make a lot of somewhat subjective judgment calls upfront, and then be held accountable when objectivity kicks in sometime in the future. Additionally, once a particular model/methodology is in place, it will be difficult to revise, as it entrenches and intertwines itself deeply into a company’s financials going forward,” he said.
Even the financial services industry has complained that many in their industry lack the macroeconomic and financial forecasts, historical macro data and tools required to simulate the range of credit loss scenarios required by CECL.
In a late hour effort, members of both congressional chambers are supporting legislation to delay implementation of CECL.
“The FASB is moving forward with an accounting standard affecting generally every financial institution in the country and the customers they serve, without a proper study of its broader economic impact. To me, this is yet another example of an unaccountable bureaucracy not taking the appropriate steps to ensure that it is helping instead of hurting folks,” said North Carolina Representative Ten Budd.
In the absence of a reprieve, the effective dates are a follows:
- For public business entities that are SEC filers for fiscal years beginning after Dec. 15, 2019, including interim periods within.
- For all other public business entities for fiscal years beginning after Dec. 15, 2020, including interim periods within.
- For all other entities for fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021.
Lease Accounting Standard – 6 Months in
It’s been over six months since the new lease accounting standard (ACS Topic 842, Leases) went into effect and almost 400 of S&P 500 companies have transitioned to the new standard.
The new standard requires lessees to report on their balance sheet assets and liabilities related to leases of one year or more. The standard took effect in 2019 for public companies and will take effect in 2020 for nonpublic companies.
A new study, from lease accounting software provider LeaseAccelerator, analyzed the interim financial reports issued between Jan. 1 and June 14, 2019 of 395 S&P 500 companies.
The study found that collectively the group reported a total of $503 billion in operating lease liabilities and $69 billion in finance lease liabilities on their balance sheets.
Other findings of the study include: 190 companies added at least one lease related line item to the face of their Balance Sheet (ROU Assets, Current and/or Long-Term Operating Lease Liabilities); 354 companies reported a separate “leasing” footnote with required new disclosures, while 13 companies did not have any lease disclosures — likely due to immateriality.
Six companies were “early adopters” of the standard, adopting it before its effective date, while 389 transitioned on the effective date, and 105 plan to transition later in 2019.
Locating all of a company’s leases and extracting the data required to comply with the new standard has been a time consuming challenge for many companies and their financial statement preparers.
FASB May Delay Adoption of Standards
The FASB will consider whether to extend implementation timelines for private companies and not-for-profit organizations. It also will consider extending time for smaller reporting companies. FASB Chair Russell Golden said the topic will be considered at a public meeting this month. “As part of the process, we’ll look at the effective dates of certain standards that are not yet effective to determine whether they should be amended to reflect a new philosophy,” he said.
Golden noted that several years ago changes made to GAAP became effective for both public and private companies at the same time.
“We did a lot of research that helped us understand that private companies could reduce their costs by learning from public companies. And so we began to give an additional year for private companies and we gave an extra year for not-for-profits. What we’ve observed in looking back on revenue recognition is that, for some of these major standards, perhaps a year is not long enough for the private companies to reap the benefit of the reduction of cost,” he said.
Explaining the process, Golden told Accounting Today that he has introduced the issue as a research topic for the FASB staff to study. “That’s typically what happens,” he explained. “We put it on our research agenda and then the staff brings various things to the board. Once the board determines if we want to change our philosophy to go to two years for private companies and not-for-profits and then have a separate effective date for smaller reporting companies,” he said.
Indexing Capital Gains Tax
Consensus is growing among White House officials to advance a proposal to index capital gains to inflation and ensure the benefit takes effect before President Donald Trump faces re-election in 2020, reports Bloomberg News.
The White House has not responded to a request for comment, but Bloomberg, citing people familiar with the matter, reports that because the proposal has little chance of passing Congress, the administration is considering implementing the tax cut through rule change or executive order.
It would not be the first time such a proposal has been considered. President George H.W. Bush’s administration dropped a similar proposal when his senior officials could not agree if it could overcome a legal challenge to an executive order.
Treasury Secretary Steven Mnuchin in 2018 said he was studying whether the administration could sidestep Congress and issue a rule to allow capital gains to be indexed to inflation. The change is strongly supported by White House economic adviser, Larry Kudlow, who has said the policy would spur job creation and economic growth because people wouldn’t be taxed on what he’s called “phantom income.”
Tax Extenders Bill Advances in Congress
It’s got a long way to go, but the House Ways and Means Committee last month voted 25-17 to advance a bill that would temporarily extend several tax breaks that expired at the end of 2017, 2018, and some that will expire at the end of 2019.
Examples include The Work Opportunity Tax Credit, provisions for the renewable energy sector, and tax benefits for tuition expenses. The tax breaks were created to satisfy particular constituencies, and were purposely designed to have a short lifespan. However, once expired, Congress may vote to extend them (hence the name). Congress has acted to extend extenders so many times that some provisions have been in the Tax Code for years.
When Congress votes to extend, the tax benefit is not only restored (again temporarily) but it is retroactively effective. Unfortunately, Congress usually does not get around to voting on the tax extenders until well after the tax year has ended and tax returns filed. As a result, tax planning is more difficult.
The Senate Finance Committee supports a clean extension with nothing added. However the House Ways and Means Committee bill contains an offset that would pay for the extenders by accelerating the expiration of the higher estate tax exemption levels from 2025 to 2022. (Under the Tax Cuts and Jobs Act, the exemption increased from $5.5 million to $11 million for individuals, and from $11 million to $22 million for couples.)
Republicans are opposed to the offset provision. So for now the only thing being extended will be congressional negotiations that may continue thru year end — once again making life more miserable for tax accountants as they prepare for the filing season.
Some Zillionaires Say “Tax Me”
Nineteen of the wealthiest American’s have penned a letter calling for a wealth tax on themselves to help offset income inequality and provide funding for climate change and public health initiatives.
“We are writing to call on all candidates for President, whether they are Republicans or Democrats, to support a moderate wealth tax on the fortunes of the richest one-tenth of the richest 1% of Americans – on us,” according to the open letter signed by 19 individuals – one anonymously. “The next dollar of new tax revenue should come from the most financially fortunate, not from middle-income and lower-income Americans,” they wrote.
Signers supporting the moderate wealth tax included Abigail Disney, George Soros, Facebook co-founder Chris Hughes, and Liesel Pritzker Simmons, who told Bloomberg, “We are part of the problem, so tax us.”
Another signatory, Seattle entrepreneur Nick Hanauer, first warned about the country’s growing wealth divide in his 2014 memo addressed to “My Fellow Zillionaires,” published in Politico Magazine. “There is no example in human history where wealth accumulated like this and the pitchforks didn’t eventually come out,” he wrote.
Be careful to leave your sons well instructed rather than rich, for the hopes of the instructed are better than the wealth of the ignorant. –Epictetus
I lost 80 percent of my wealth and then gave away over half of the rest. So I’m a man of modest means now. But if you budget carefully and watch your expenditures, you can get by on a couple billion dollars. –Ten Turner
I am grateful for the blessings of wealth, but it hasn’t changed who I am. My feet are still on the ground. I’m just wearing better shoes. –Oprah Winfrey
You aren’t wealthy until you have something money can’t buy. –Garth Brooks
An Audited Legacy of Quality
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