The CECL apocalypse and other news from FASB

The Financial Accounting Standards Board (FASB) has issued many new accounting standards over the past couple years, several of which will have an impact on credit unions. We have summarized the most applicable updates below:

Revenue recognition update

In 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which will supersede the current revenue recognition requirements. This new standard will be effective for credit unions in 2019. It provides a principles-based, five-step process for recognizing revenue that’s in sharp contrast to the current rule-based, industry-focused standards that have been in use for decades. The primary impact of the standard is a change in the timing of when revenue is recognized.

Although the standard will not change the accounting for revenue from contracts relating to loans, investment securities, and most other financial instruments (which are scoped out of the new guidance), it could have a significant impact on the financial statements of your business members and their abilities to meet financial covenants established in existing loan agreements. Loan officers and other executives will need to be aware of these impacts and begin a dialogue with business members to understand how the standard will impact established financial covenants.

The primary challenge for credit unions is to determine how this new guidance applies to your noninterest income, of which the most applicable transactions are listed below:

1. Credit card interchange fees and share account fees
   It is important to ensure standard contracts are used where intended and the accounting implications of the terms of those contracts are understood. Additional guidance is expected to be issued around these topics as the AICPA and FASB task forces complete their reviews of the standard.
2. Loyalty point programs
   The current liability method for reward points may potentially be replaced by a deferred revenue method for credit or debit card income and its associated reward points. This would cause a larger liability as the income associated with the forfeiting of reward points would not be recognized until the points are actually forfeited. Formal guidance directly related to loyalty points is currently in review by an AICPA task force.
3. Sales of other real estate owned
   Requirements for recognizing gains on institution-financed sales of other real estate have been relaxed in the new standard. Reaching a down payment threshold is no longer required prior to recognizing a gain. Rather, as long as the sale meets the requirements for revenue recognition, the gain can generally be recognized.
4. Sale/Leaseback transactions
   The requirement to defer gains when an entity sells but then leases back property is relaxed. The gain can be recognized as long as the sale meets the requirements for revenue recognition.

Leases update

In February 2016, the FASB issued ASU No. 2016-02, Leases, which will supersede the current lease requirements. The new standard will be effective for credit unions in 2020 and requires lessees to recognize a right-of-use asset and related lease liability for all leases, with a limited exception for short-term leases. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of operations. Currently, leases are classified as either capital or operating, with only capital leases recognized on the balance sheet. The reporting of lease-related expenses in the statements of operations and cash flows will be generally consistent with the current guidance.

CECL update

In June 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The new standard will be effective for credit unions in 2021 and includes increased disclosures and various changes to the accounting and measurement of financial assets including the credit union’s loans, held-to-maturity and available-for-sale debt securities. Each financial asset presented on the balance sheet would have a unique allowance for credit losses valuation account that is deducted from the amortized cost basis to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in this update also eliminate the probable initial recognition threshold in current GAAP and instead, reflect an entity’s current estimate of all expected credit losses using reasonable and supportable forecasts. Upon adoption, the standard will be applied using a modified retrospective transition method to the beginning of the first reporting period in which the guidance is effective. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date.