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Congress Poised to Derail Biggest Bank Accounting Change in Decades

March 26, 2020, 9:51 AM

The Senate on Wednesday took the unprecedented step of trying to force a delay of the biggest change to bank accounting in decades as part of a wide-ranging coronavirus economic relief package.

The provision is tucked inside the sweeping measure (H.R. 748) passed by the Senate late Wednesday. The House is expected to vote on the package Friday. The provision would allow banks and credit unions temporary relief from the current expected credit losses (CECL) accounting standard. It would give them until Dec. 31—or when public health officials declare the pandemic over, whichever comes first—to overhaul how they tally losses on souring loans. Large publicly traded banks were supposed to adopt the new accounting standard on Jan. 1.

Lawmakers have attempted to intervene plenty of times in the way accounting standards take shape, but if the House passes the Covid-19 relief package and President Donald Trump signs it into law, it will be the first time Congress has blocked or delayed the work of the Financial Accounting Standards Board. Trump has said he supports the package.

“It’s not a good moment in FASB history,” said Jeff Mahoney, general counsel at the Council of Institutional Investors.

Banks have never been eager to adopt CECL, but the economic fallout from the coronavirus outbreak brought fresh attention to their pleas for delays or outright changes. The fallout is stretching businesses and consumers thin. Banks expect losses on loans to pile up. Dealing with a new accounting standard that forces them to recognize expected losses the day they issue loans will jar already unpredictable earnings, force them to shore up capital, and make them reluctant to lend to all but the strongest borrowers, they say.

The chair of the Financial Accounting Foundation, the parent organization of FASB, appealed to Senate and House leadership late Monday to resist intervening in the debate. The rule change, drafted in the aftermath of the 2008 financial crisis, brings needed transparency to bank balance sheets and will give investors clearer pictures of looming losses, foundation Chair Kathleen Caseysaid in a letter to congressional leaders.

Allowing banks to opt out of the new rule until the crisis passes “would act to diminish confidence in generally accepted accounting principles (GAAP), financial reporting and our markets during this critical time,” wrote Casey, a former SEC commissioner.

Through the Years

Established in 1973 to wrest accounting rules out of the hands of the accounting industry, FASB is a private-sector body that meets in a nondescript office park in Norwalk, Conn. Its location is by design—away from politicians in Washington and money on Wall Street. Most of its funding comes through accounting support fees established by the Sarbanes-Oxley Act of 2002, which mandated the fees to be collected from public companies.

Congress doesn’t hold the FASB’s purse strings, and the board isn’t beholden to lawmaker directives.

But Congress gives the Securities and Exchange Commission the authority to set accounting rules, and the SEC essentially outsources the task to the FASB.

Six bank trade groups reminded SEC Chairman Jay Clayton of this power in a letter March 22, calling on him to use the SEC’s authority to overturn the standard or provide all banking industry issuers an option to delay implementing it.

The SEC has overturned a FASB accounting standard only once, in 1978. Statement No. 19 called on oil and gas companies to recognize expenses from drilling dry wells. Almost as soon as the FASB published it, the SEC issued a statement saying it would get rescinded. FASB had to retreat.

The securities regulator intervened again, with a lighter touch, in 1993 when the FASB proposed making companies record stock options as expenses. SEC Chairman Arthur Levitt told the board not to jeopardize its future by issuing a rule that got so much pushback. The FASB backed away in 1994 and produced a standard that required disclosures, but not income statement recognition of stock option expenses.

Stock compensation came back into the spotlight in 2004. Empowered by the accounting scandals at Enron and WorldCom and cries for more corporate transparency, the FASB definitively said companies had to expense stock compensation. In July 2004 the House by a 312-111 vote passed H.R. 3574, which blocked FASB’s rule. The bill failed to gain traction in Senate.

Mark-to-market or fair-value measurement came under fire in the aftermath of the 2008 financial crisis. Former FASB Chairman Robert Herz got grilled by a congressional panel for hours in March 2009, where he had to promise he would produce new guidance on how to measure assets during extreme economic turmoil within three weeks.

“I must have been there seven or eight hours getting pretty much raked over the coals,” Herz said.

More Questions

The credit losses accounting standard was never popular with banks, but it didn’t look as though debate about it would compare to the stock compensation or fair value accounting pressure FASB faced in the past.

Then Covid-19 threw a wrench into the crux of the new rules. The new accounting forces businesses to look to the future, consider past experience, and assess current conditions to figure out which of their loans will go bad before they go bad. They then have to set aside reserves to cover those losses. Big public banks started following the new rules in January. Privately held banks, credit unions, and smaller public companies have until 2023 to overhaul their accounting.

Increasing loan loss reserves dings banks earnings, but banks also have to worry about the knock-on effect the accounting change has on the capital they must hold to meet bank regulator requirements.

Delaying the accounting standard doesn’t solve the concerns banks have about the increased capital they’ll have to hold once the new rules go live. That’s up to regulators to determine. The draft of the bill also only specifies banks and credit unions, not businesses, in general. While banks expect the biggest accounting change from CECL, any business that extends credit to customers to buy cars, trucks, or TVs has to follow the new rules. The likes of Ford Motor Co. and General Motors Co. won’t benefit from the congressional delay as drafted.

In addition, the draft gives banks the option to decide if they want to follow the new rules on time or not. This could mean some banks follow old accounting rules, which allow them to record losses only after they’ve happened, and others follow the new rules.

“What they’re really asking for is to allow them to use any number they want to use,” said Lynn Turner, former SEC chief accountant.

To contact the reporter on this story: Nicola M. White in Washington at nwhite@bloombergtax.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Kathy Larsen at klarsen@bloombergtax.com

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