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SEC Gives Banks Green Light to Defer Credit Loss Deadlines (1)

April 3, 2020, 2:39 PMUpdated: April 3, 2020, 6:19 PM

The SEC assured banks Friday that they would still be in compliance with U.S. accounting rules if they opted to delay a major shift in the way they account for credit loss reserves.

Sagar Teotia, chief accountant of the Securities and Exchange Commission, said the regulator would consider the deferral that Congress created for the loan loss rules to comply with U.S. generally accepted accounting principles. The relaxed deadlines would be available only for the time periods spelled out in the coronavirus relief package.

It’s an important clarification from the securities regulator. Banks had been waiting for it since President Donald Trump signed the sweeping crisis measures into law March 27.

The new stimulus law (Public Law 116-136; see BGOV Bill Summary), known as the CARES law, gives banks the option to delay the current expected credit losses (CECL) accounting standard until Dec. 31 or until federal authorities declare the national state of emergency over, whichever is earlier. The largest U.S. banks were expected to begin reporting under the new accounting rules this spring, with their first-quarter reports.

“There was maybe relief and confusion at the same time,” said Brad Bird, national assurance technical partner at BDO USA LLP, of the accounting provisions in the law.

Banks had feared that taking advantage of the lifeline provided by Congress could put them out of step with U.S. securities laws, which require them to follow GAAP.

Teotia said in a note on the commission’s website that the office had received calls from auditors and preparers who wanted to know whether the SEC would recognize the deferral or whether they should continue complying with the deadlines that the Financial Accounting Standards Board laid out in its rule.

Under the law, banks may choose to suspend accounting for troubled debt restructuring, another form of relief which the SEC would also treat as GAAP.

In the U.S., the SEC grants its authority to set accounting standards to the independent FASB. The two entities have been working closely together on emerging issues stemming from the outbreak, Teotia said.

Judgments, Independence, and China

Teotia also emphasized that preparers needed to make well-reasoned judgments as they revise accounting estimates and make other financial reporting updates ahead of the first-quarter filing season. Companies have to disclose those judgments—important information for areas like hedge accounting, debt modifications, lease accounting, fair value measurements, and even revenue recognition.

Stock prices have plummeted since February, and Wall Street this week closed the books on one of its worst first quarters on record. Companies have been forced to close their doors, furlough workers and slash dividends to cope with the dual economic and health crises.

The uncertain business landscape means that investors need high quality financial information more than ever, Teotia said.

For the SEC, that includes auditor independence, the foundation for reliable financial reporting. Audit committees and management share a responsibility for independence monitoring, he said.

Meanwhile, the SEC also remains focused on the quality of audits originating from China. Officials met with the leaders of two more accounting firms last week to discuss how the firms oversee that work, Teotia’s note said.

Members of Congress are equally concerned about the reliability of financial reporting emanating from China-based companies. Thursday, Florida Sen. Rick Scott asked the SEC to not provide filing deadline relief to such companies.

“I’ve expressed my concern about the lack of compliance and limitations on oversight of U.S.-listed Chinese companies, which opens the door to adverse activities, including insider trading, accounting fraud, and corporate governance concerns that could put U.S. investors, including pensions, at risk,” Scott’s letter reads. “As our nation faces an unprecedented crisis, we have to put American safety and American businesses first.”

-with assistance from Nicola White

(Updates throughout with additional reporting.)

To contact the reporter on this story: Amanda Iacone in Washington at aiacone@bloombergtax.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Vandana Mathur at vmathur@bloombergtax.com

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