The ABA’s “FAQ on FASB” can be a useful reference doc for a broad swath of users, preparers, auditors and board members, not only the banking industry.
I asked Donna Fisher, Senior Vice President, Tax, Accounting & Financial Management at the ABA for some background on why the ABA created this FAQ on FASB document, and for some of her initial reactions to the proposal.
- Why did the ABA create the “FAQ on FASB” (on FASB’s credit loss proposal) document; what is the purpose of the document to your members and the public? It’s a plain English description of the proposal, along with how it differs from the current rules, and is intended to help provide a shortcut for understanding the proposal. Hopefully, this will translate into better quality comment letters.
- What’s your initial reaction, overall, to FASB’s proposal?
FASB’s outreach found that U.S. investors, regulators, and industry believe the IASB’s proposal did not work. FASB decided to address the concerns being expressed, and moved toward a model with an improved conceptual basis that is also easier to explain. Expected loss makes sense; however, for healthy loans, the farther out in time you go, the lower the confidence level you have. This could result in volatility that is due to unreliable assumptions rather that credit risk. It seems to us that the model should be expected losses that have a reasonable confidence level.
- In what major ways, broadly speaking, would ABA like to see improvements in the proposal issued by FASB, and in what we know of the proposal to be issued by the IASB? The key sticking point is how to account for healthy loans. We believe under current GAAP for healthy loans, some level of losses has been incurred (though not specifically identified), and should be recorded. Some other countries do not agree with this, as they believe the pricing of the loans already includes consideration of loss: riskier loans have higher interest rates. This difference of opinion is difficult to overcome, and the two models reflect those differences of opinion. (a) FASB -- (healthy loans): expected losses should be based on those that can be estimated with a reasonable confidence level. (b)IASB – (healthy loans): same as above.
- Will the FASB's and IASB's proposals address bankers’ and bank regulators’ concerns about procyclicality claims made about, e.g. fair value accounting a few years back during the economic crisis? And, as follow-on to that, does the ABA believe this new proposal will mitigate the downside impact of future procyclicality ... i.e., is this proposal somewhat countercyclical? The IASB’s model, if applied in the US, will not address procylicality and may not address the “too little, too late” concerns. The FASB’s proposal will not necessarily address procyclicality, but it seems to address the “too little, too late” concerns. With that in mind, we don’t believe that anyone expected the large downturn during the crisis. So, any model would still have been subject to “too little too late” criticism. [As to the follow-up question,] The FASB's proposal does maintain that the status of the economic cycle should be considered. So, there is a chance that it could be countercyclical.
- And yet... how would ABA help explain, that this proposal is not so countercyclical as to be 'cookie jar reserves' - if indeed 'cookie jar reserves' or 'smoothing' - when it comes to the allowance for loan losses or allowance for credit losses, is per se a bad thing in and of itself (at least from a safety and soundness perspective, and potentially, from a GAAP perspective as well)? It seems that users of financial statements want more in reserves than current GAAP allows – they want a more forward looking approach, which could be viewed as wanting less volatility. That’s not cookie jar, as long as there is a basis for the estimates of expected losses, accompanied by sufficient disclosures.