Dear Board of Directors and Chief Executive Officer:
On June 16, 2016 the Financial Accounting Standards Board issued a new accounting standard, Accounting Standards Update (ASU) 2016-13, Topic 326, Financial Instruments – Credit Losses. The new standard introduced the current expected credit losses methodology (CECL) for estimating allowances for credit losses.1
NCUA has developed the attached Frequently Asked Questions document jointly with the federal banking agencies to provide credit unions, examiner staff, and other stakeholders with a better understanding of the CECL requirements and associated supervisory expectations. Question 22 provides suggested steps for management to consider in preparation for CECL implementation.
While the regulatory reporting effective date of this new standard is not until December 31, 2021, your credit union needs to take steps in advance to ensure effective implementation of the standard.2 The board of directors and senior management of your credit union should become familiar with the new accounting standard to assess how the new standard differs from the existing incurred loss model. Once familiar with the standard, you should evaluate different allowance estimation methods for appropriateness within your credit union. NCUA does not currently plan to begin evaluating a credit union’s implementation efforts until sometime after 2018.
CECL may result in a decrease in net worth upon implementation for some credit unions. NCUA is training examiners to take this switch into account when evaluating capital adequacy. To assist with this transition, we will add a new ratio to the Financial Performance Report to illustrate net worth differences prior to and after implementation of CECL. Credit unions should evaluate and plan for the potential impact of the new accounting standard on regulatory capital.
We continue to work with the other federal banking agencies to develop uniform guidance and supervisory expectations. We will expand and release this Frequently Asked Questions document as new or updated issues are developed. We will also be conducting webinars and classroom training for federal and state examiners to help ensure a consistent implementation of CECL during the examination process. Additional webinars for credit unions are planned, as well.
I encourage you to review this letter and to contact your regional office or state supervisory authority if you have any questions on this subject.
NCUA and the other federal banking agencies issued a joint statement to provide information about the new accounting standard. A complete copy of the joint statement is available at: https://www.ncua.gov/newsroom/Documents/interagency-joint-statement-accounting-standard-financial-instruments-06-17-16.pdf (opens new window)
The effective date for any credit union that meets the definition of a Public Business Entities (PBE) will be March 31, 2021. PBEs are defined in the answer to question #4 of the FAQs. Early application of CECL is permitted for institutions with fiscal years beginning after December 15, 2018. NCUA is not requiring early application by credit unions.