Agencies reporting proposal for the implementation of Current Expected Credit Losses (CECL)

January 22, 2019 | Financial services

There are several significant regulatory reporting changes occurring in 2019 impacting banking organizations. This is the first of a series of articles on the upcoming changes. The Financial Accounting Standards Board (FASB) issuance of Accounting Standards Update (ASU) 2016-13 (Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Loses on Financial Instruments)¹ replaced the existing incurred loss methodology affecting financial assets. As with all significant accounting changes, this results in revisions to regulatory reports. The focus of this article is the report changes that the FFIEC² (Federal Financial Examination Council) and the Federal Reserve Board (FRB) has proposed for the adoption of CECL.

The FFIEC published draft forms and instructions for the following reports:

• FFIEC 031/041/051 (Consolidated Reports of Condition and Income (Call Reports))
• FFIEC 101 (Risk-Based Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework)
• FFIEC 002/002s (Report of Assets and Liabilities of US Branches and Agencies of Foreign Banks/Report of Assets and Liabilities of a Non-US Branch that is Managed or Controlled by a US Branch or Agency of a Foreign (Non-US) Bank
• FFIEC 030/030s (Foreign Branch Report of Condition)

The effective date for regulatory reporting

The effective dates for the adoption of ASU 2016-13 depend on the type of company (public versus non-public). The effective date for US GAAP and regulatory reporting are:

Table 1 Effective Dates for Adoption

The adoption of ASU 2016-13 will require significant changes to the item definitions, instructions changes, and items related to this topic. Since early adoption is permitted, changes to regulatory reporting will be required starting with March 2019. Until all firms are required to adopt ASU 2016-13, regulatory reports have to accommodate pre and post ASU 20016-13 reporting. Additionally, the different effective dates and regulatory capital transition option (as described below) will stretch the changes from 3/31/2019 to 12/31/2022, creating a change management challenge for firms.

The change in scope and methodology under ASU 2016-13 requires changes to the terminology used throughout the form and instructions. For example, references to allowance and provision for loan losses will be revised to reflect that ASU 2016-13 covers all financial assets and not just loans.

The impact on the Income Statement-related schedules:

RI (Income Statement) and RI-D (Income from Foreign Offices (FFEIC 031 only))

Schedule RI and Schedule RI-D revisions were proposed to change the scope of reporting allowance for loans losses to allowance for credit losses. Additionally, since ASU 2016-13 eliminates the concept of “other than temporary impairment” (OTTI), memo item 14, will be removed effective 12/31/2022. In the interim, firms will no longer report this item once the firm adopts CECL.

RI-B (Charge-offs and Recoveries on Loan and Leases and Changes for Allowances for Credit Losses)

Schedule RI-B has several significant changes, including the addition of several items. First, two new columns are being added to Part II of the schedule to capture changes in the allowance for credit losses during the quarter for assets other than loans (e.g., HTM and available-for-sale securities (AFS)). Additionally, two new memo items have been added to Part II to report the amount of provision and allowance for credit losses of financial assets, other than loans and HTM debt securities that are measured at amortized costs. These columns and items are being added to the reports effective 3/31/2019. Of course, these items should not include any values until a firm adopts ASU 2016-13.

Since ASU 2016-13 eliminates the concept Purchase Credit Impaired (PCI) loans several schedules on the Call Report were revised to address this. On Schedule RI-B, memo item 4, which captured post-acquisition allowance for PCI, will be deleted 12/31/2022 and in the interim, no longer reported once a firm adopts the new standard. Revisions to RI-B also includes to definitions for items 4 and 6 of Part II. Item 4 has been revised to now include changes in allowance from transfer between financial assets rather than just between loan types. The adjustments reported in item 6 will now also include the impact of applying ASU 2016-13 and adding pre-captioned items to explain these adjustments.

RI-C (Disaggregated Data on the Allowance for Credit Losses)

Currently, Schedule RI-C only captures data on loan and lease losses the proposed changes to the schedule RI-C creates a new section that will include the six loan columns currently reported plus the following four new HTM classifications:

• Securities issued by state and political subdivisions
• Mortgage Backed Securities (MBS) (separated by US government guaranteed and all other MBS)
• Assets backed securities and structured products
• Other debt securities

However, loans will include data for amortized cost and amount of allowance for credit losses. For Held-To-Maturity (HTM) debt securities, only the amount of credit losses will be reported. The new section is not completely additive reporting. That is, firms will only report Part I until they adopt ASU 2016-13. Once the standard is adopted firms will report Part II and discontinue to report Part I. Effective 12/31/2022, once all firms have completed adoption ASU 2016-13, Part I will be removed from the Call Report and Part II will become the complete schedule.

RI-E (Explanations)

To provide information on the impact ASU 2016-13 on each banking organization, Schedule RI-E has several significant revisions. The following pre-captions items have been added to disclose the impact of CECL to disclose the impact of CECL:

• Cumulative effect adjustment for the adoption of ASU 2016-13 (Item 4.a)
• Initial allowance for PCD assets (Item 6.a)
• The impact from the adoption of CECL methodology on HTM debt securities and held-for-investment loans (Item 6.b)

The impact on the balance sheet-related schedules

The most significant revisions to the balance sheet and related schedules, other than a change to expected loss methodology and adopting the term allowance for credit losses throughout the forms and instructions are:

• Gross versus net reporting of assets for allowance for credit losses
• Regulatory capital impact of the adoption of CECL

On the balance sheet, only loan and leases held for investment purposes measured at amortized cost will be reported gross of allowance for credit losses. All other assets covered by CECL that are measured at amortized cost would be reported net of allowance for credit losses. Therefore, the instructions for HTM debt securities, resale agreement (and similar financing transactions), and “other assets” will be revised to reflect this reporting treatment. However, this reporting differs on several schedules. (The regulatory capital schedule changes are discussed separately below). However, several of the schedules require gross reporting.

Table 2 Gross versus Net Reporting

Two other accounting impacts of ASU 2016-13 resulted in changes to the Call Reports. First, the elimination of the concept of PCI results in no longer reporting, items that disclose information about PCI assets once a firm adopts CECL. These items will be removed from the reports effective 12/31/2022. Specifically, these revisions relate to RC-C Part I, Memo Items 7.a. and 7.b and Schedule RC-N, Items 9.a and 9.b. Secondly, the instructions for Schedule RC-F will be revised to address the change in reporting accrued interest receivable. Under ASU 2016-13, firms will no longer separate accrued interest receivable from the assets amortized the cost. Therefore, the instructions for RC-F will be revised to state that accrued interest receivable included in assets amortized cost should be excluded from other assets.

As it relates to pass due and non-performing loans, ASU 2016-13 does not provide any guidance on determining the status of loans. Therefore, there are no changes for classifying past due or nonaccrual loans.

The impact to Regulatory Capital schedule

The banking agencies published a final rule on regulatory capital for the implementation of CECL. The rule provides an option that allows institutions to elect to phase in the impact of ASU 2016-13. Revisions to the capital schedule RC-R reflects the impact of the accounting for allowance for credit losses on regulatory capital, the risk weights of assets, and election of a transition period.

Like the income and balance sheet schedule, Allowance for Credit Losses (ACL) replaces the Allowance for Loan Losses throughout the form and instructions. The CECL Capital Rule requires that risk weight for assets that are measured at amortized cost, to a gross of any allowance for credit losses (except for allowance for credit losses for PCD, which will be risk-weighted net of any allowance for credit losses). To capture data on the impact of ACL on PCD, assets three new memo item have will be added to RC-R Part II. Memo items 4.a, 4.b, and 4.c will disclose the amount of ACL for PCD assets by broad assets categories (i.e., loans, HTM debt securities, and other applicable assets).

Under the CECL Capital Rule firms that experience a reduction in retained earnings from CECL the option to phase in the impact of ASU 2016-13. The transition option allows firms to phase in the “day one” impact of CECL over a three-year period. Firms would elect the option on the date on which they adopt ASU 2016-13. To indicate if a firm elected to take the transition option a new item has been added to RC-R. In Part I, item 2.a. The new item would indicate if a transition adjustment is in place for the current quarter. The item would be completed when a firm adopts ASU 2016-3, regardless of the firms elects the transition option. The item will be continued to be reported until it is removed when all possible transition periods end (3/31/2025). The instructions for the following items will be revised to include guidance for reporting the impact of the transition option:

• RC-R Part I
  • Retained earnings (Item 2)
  • Allowance for loan and lease losses includable in Tier two capital (Item 30.a (FFIEC 31/FFIEC 041) (Item 30 (FFIEC 051)
  • Average total consolidated assets (Item 36)
  • Total leverage exposure (Item 45.a)
• RC-R Part II
  • All other assets (Item 8)

While there are no new data items to capture the effect of electing the transition option on regulatory reports (disclosures requirements for capital adequacy has been revised to include disclosure requirements on CECL.

Regulatory Capital Reporting for Institution Subject to the Advanced Capital Adequacy Framework (FFFIEC 101)

While the CECL Capital Rule revises the capital rules for advanced approach institutions. there are no new items on the FFIEC 101. However, to align the FFIEC 101 with the revised capital rules, the instructions have been updated to:

1. Replace the definition of eligible credit with the definition of ACL
2. Provide guidance for firms that elected the transition option. These changes affected the following items:

• Advanced Approaches Regulatory Capital (Schedule A)
  • Eligible credit reserves included in Tier two Capital (Item 50)
  • Total allowance for loan and lease losses under the standardized approach (Item 76)
  • Amount of allowance for loans and lease losses includable in Tier two capital under the standardized approach (Item 77)

Foreign Branch Report of Condition (FFIEC 30/30S)

The FFIEC 030 reports collect balance sheet data from foreign branches of US banks. Since the reporting entity is branched there is no income statement. All assets on the FFIEC 30 reports are reported gross of any allowances. To account for allowances, the amount of allowance is reported as a due to head office (Item 16). The reporting treatment will remain unchanged after the adoption of ASU 2016-13. The instructions being made to address a previous oversight that includes allowance in due from head office item. Additionally, the instructions will be revised to reflect that accrued interest receivable should be included in the amortized cost and should not be reported in Other Assets.

Report of Assets and Liabilities of US Branches and Agencies of Foreign Banks (FFIEC 002) and the Report of Assets and Liabilities of Non-US Branch that is Managed or Controlled by a US Branch or Agency of a Foreign Bank (FFIEC 002S)

The Call Report for US branches and agencies of foreign banks are reported in US GAAP. Therefore, the reporting instructions will be revised to reflect ASU 2016-13. However, as outlined, under SR letter 95-4, US branches of foreign banks are not required to maintain a general allowance for loan loss. Firms may elect to maintain such an allowance, however. In that case, they must follow US GAAP and will require to adopt ASU 2016-13. For those entities applying ASU 2016-13, assets should be reported gross of any allowance. Similar to FFIEC 030, the allowance would be reported in “due to head office” lime item.

FFIEC 002s which is a supplement to the FFIEC 002 that collects data from managed and controlled offices of US branches of foreign banking organizations (FBOs). It will also be revised to reflect allowance accounts being reported in the due to accounts.

Generally, a branch or agency that chooses to maintain a general allowance will have a significant investment in moving to the expected loss model. Table 3 outlines the changes to the form and instructions to these reports.

Table 3 Changes to the FFIEC 002/002s

Federal Reserve Reporting

Separately from the FFIEC Call Report proposal, the Federal Reserve published a proposal for reports affected by CECL.³ Included in the proposal are changes to the following reports:

• Financial Statement for Holding Companies (FR Y 9 family of reports)
• Financial Statements of US Nonbank Subsidiaries Held by Foreign Banking Organizations ( FR Y 7N family of reports)
• Bank Holding Company Report of Insured Depository Institutions Section 23a Transaction with Affiliates (FR Y 8)
• Financial Statements of US Nonbank Subsidiaries of US Holding Companies ( FR Y 11 Family of Reports)
• Financial Statements of Foreign Subsidiaries of US Holding Companies (FR 2314)
• Quarterly Savings and Loan Holding Company Report (FR 2320)
• Weekly Report of Selected Assets and Liabilities of Domestically Charted Commercial Banks and US Branches and Agencies of Foreign Banks (FR 2644)
• Consolidated Report of Condition and Income for Edge and Agreement Corporations (FR 2866b)

The changes to the FR Y 9 family reports align with the proposed changes to the Call Report and where applicable, the CECL Capital Rule. The other reports also align with the FR Y 9 and Call Report changes. Since the number of detailed schedules is less on the other reports, the number of changes are limited. Table 4 outlines effective dates for changes to each report.

Table 4 Effective Date for Federal Reserve Report Changes

Key takeaways

• End-to-end Implementation—Considering the impact across reports, an end-to-end data attribute approach should take into account end to end impact
• Coordination among groups—The adoption CECL is a major implementation project that requires firm-wide team participation requiring coordinates between accounting policy, capital planning, credit analysis, and regulatory reporting to assure that it is implemented effectively.
• FBO Impact—Of note is that while FBOs are not required to transition to CECL if they do not hold an allowance for credit losses on the branch level. FBOs are required to adopt CECL for IHCs, subsidiaries of IHC, and non-bank subsidiaries of the FBO. This can be a significant undertaking, especially for firms who have recently adopted IFRS 9.
• Other report impact—Other reports will also be impacted by CECL including country exposure reporting (FFIEC 009), Treasury International Capital (TIC) Reports, and the Capital Assessment and Stress Testing (FR Y-14A/Q/M) reports.
• The comment period for revisions for the Call Report has closed and the comment period on the Federal Reserve reports ends February 21, 2019.

Endnotes

¹ Financial Accounting Standards Board, Accounting Standards Update (ASU) 2016-13 (Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Loses on Financial Instruments)

² The FFIEC includes the Office of the Comptroller of the Currency (OCC), Federal Reserve System (Federal Reserve), and Federal Deposit Insurance Corporation (FDIC)

³ Federal Register, Volume 83, Number 238, December12, 2018 Pages 63870 through 63885