Dear Board of Directors and Chief Executive Officer:
On June 16, 2016, the Financial Accounting Standards Board (FASB) 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
The NCUA has developed the attached updated document (Frequently Asked Questions) 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. Questions 24-37 have been added to the Frequently Asked Questions previously released in NCUA Letter to Credit Unions 16-CU-13 in December 2016.
While the regulatory reporting effective date of this new standard is not until December 31, 2021, the NCUA reiterates that steps need to be taken by your credit union in advance to ensure effective implementation of the standard. 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, different allowance estimation methods should be evaluated for appropriateness within your credit union. The NCUA does not currently plan to begin evaluating a credit union’s implementation efforts until sometime after 2018.
As the NCUA has previously stated, CECL may result in a decrease in net worth upon implementation of the standard for some credit unions. The NCUA will train examiners to take this into account when evaluating capital adequacy. To assist with this, 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. This Frequently Asked Questions (FAQ) document will be expanded and released as new or updated FAQs are developed. We will also be conducting webinars and classroom training for federal and state examiners to help ensure a consistent review process of CECL practices 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.
J. Mark McWatters
1The 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)
2The 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. The NCUA is not requiring early application by credit unions.