Congress has made waves by inserting a measure into its massive coronavirus relief program that slows down when banks must comply with the biggest change in their accounting in decades.

But once the banks learn the details of the CARES Act (Public law 116-136; see Summary of the BGOV invoice) – then regulators’ interpretations of the law – they started saying ‘thank you, no thank you’ to the change they had asked for. Some say they’ll just go ahead and follow the current expected credit loss (ACEC) accounting standard as drafted.

“It seems to be a lot harder than it’s worth” to take advantage of this relief, said Jon Howard, senior accounting consulting partner in the national office of Deloitte & Touche LLP. “I don’t remember how many people are really excited about this postponement.”

One section of the $ 2 trillion stimulus package that President Donald Trump enacted on March 27 included an unprecedented step: bypassing U.S. accounting rules and giving banks more time to overhaul the way they account for bad debts. It offers them the option of waiting until December 31 or when the national coronavirus emergency is declared over – whichever comes first – to add up losses on bulk loans. Major publicly traded banks were supposed to adopt the unpopular new standard on January 1.

Questions from the start

Almost as soon as the president signed the bill, questions began.

The Securities and Exchange Commission responded to one of the larger ones a week later. SEC chief accountant Sagar Teotia said on April 3 declaration that banks would still be in compliance with US accounting rules if they chose to take the delay offered by Congress.

This was important because the SEC requires companies to follow generally accepted accounting principles in the United States, and the relaxed deadlines in the CARES Act conflict with the time limit set by the Financial Accounting Standards Board, the author of the US rules. .

But that left other critical questions. If the president declares the pandemic in the middle of the year, should the banks give up everything and follow CECL by that date? Would they start on the earliest filing date? Would they potentially have to rework their figures since the start of the year?

SEC officials answered these and other questions during a call with a panel of experts from the American Institute of CPA as well as representatives from five accounting firms on Friday, said Howard, who was at appeal and drafted a widely distributed document. abstract for Deloitte.

It boiled down to this: If a bank adopted the standard in the middle of the year, it would have to adopt CECL in its next quarterly financial statement and also calculate losses according to the standard until the beginning of the year – January. 1 for businesses in the calendar year.

Meaning: no real relief. The strict interpretation stunned some participants in the appeal.

“So once that’s done, you’re showing in your very next set of CECL financial data as if you’ve applied it all year,” Howard said.

The SEC and the FASB both declined to comment. EY LLP posted his summary of the conversation with the SEC on Monday and gave the same synopsis as Deloitte.

Less than high expectations

Even before the SEC stepped in, banks were less and less excited about Congress’ unprecedented move to curb the FASB.

Many banks were disappointed with the final wording of the law. They had pressured lawmakers for a longer delay, at least 12 months after the end of the national emergency. They also wanted it to apply to all businesses that have to follow the CECL, such as insurance companies and automakers with captive financial arms like Ford Motor Co. – not just banks and credit unions. .

Dozens of mid-sized banks, ranging from Ally Financial Inc., to Wintrust Financial Inc. on March 19 wrote letters to the to lodge and Senate leadership, calling on Congress to delay the standard until 2024.

Developed in the aftermath of the 2008 financial crisis, the new standard requires banks to record the losses they expect the day they grant a loan. This differs from outbound rules which allow companies to recognize losses only when they have strong evidence that losses have occurred, such as missed payments. It aims to eliminate rosy-looking balance sheets during tough economic times.

Reserving losses before they occur affects the bank’s income. It also forces them to consolidate the capital they need to set aside to meet the separate demands of banking regulators. Banks cannot tap that capital to do day-to-day business.

Banks, especially mid-sized banks, expressed concerns about the new accounting almost as soon as the FASB released it in 2016. The economic fallout from the coronavirus pandemic put these worries on overdrive. As bankers warned the future was impossible to predict and the FASB ignored their requests for accounting breaks, they set their sights on Congress.

On the same day the president signed the bill, the three federal banking regulators released an interim final rule offering significant relief on how banks might calculate capital under the new accounting method. This would delay CECL’s impact on regulatory capital by two years, followed by a three-year transition period.

‘They made a mess’

Banks that toyed with the idea of ​​agreeing to the optional deferral had little incentive to do so once banking regulators weighed in on March 27, said Garver Moore, chief executive of Abrigo, a advice that helps banks implement the new standard. The conversation changed “overnight,” Moore said. The regulator’s intervention helped to mitigate the impact of the new accounting on capital, solving a major concern.

Even before that, banks that invested three years or more to collect data, assemble task forces, hire consultants and install new accounting systems were unwilling to move on, said Ariste Reno, chief executive of Protiviti, another consulting firm.

“It’s potentially a very short-term delay and why would you go back and forth when you’ve already invested all that time?” Reno said. “All your processes, your staff, your board of directors, your management team are geared towards this new way of estimating.”

Ally, one of the banks that signed the letter to lawmakers requesting a delay until 2024, said in a regulatory filing Monday he elects the bank regulators offered relief. He said he adopted the new accounting rule on January 1 – just in time.

The questions that arose and the confusion that followed after Congress intervened in the work of the FASB are the reason politicians should not be stepping on the leader’s pitch, said Terry Warfield, chairman of the accounting department of the Wisconsin School of Business and administrator of the parent organization of the FASB. from 2013 to 2018.

“They probably took a letter from a bank lobbyist and said, ‘Let’s just do this,'” Warfield said. “They made a mess of it.