U.S. banks need to prepare for a significant change in accounting in 2020 as new rules to record loan and other credit losses take effect.
The new credit-loss rules might cause many banks to book reserves earlier against potential losses on loans and credit instruments than under current rules.
The new reporting regime represents the biggest accounting change for banks in decades, and one with potentially large financial reporting effects.
The coming year will be critical in many banks’ shift to new credit loss rules issued by the Financial Accounting Standards Board (ASU 2016-13, ASC 326).
Banks and other companies must consider forward-looking information, such as local or regional economic conditions and forecasts that could affect debtors’ abilities to pay off loans.
These new demands would be carried out for both financial reporting purposes, including for banks that also report under International Accounting Standards Board rules, and for safety and soundness regulation by the federal banking agencies.
Projecting what are known as lifetime credit losses under the new rules is the primary demand. Many banks are getting set to book those estimated losses earlier than in the past.
Systems changes will be required as banks prepare for estimating loan losses and setting up loss reserves. However, small banks have until 2021 to apply the credit loss rules.
Early preparation for changes in loan records systems will be key in applying a standard that could impact the bottom line. That comes from recording the estimated life-of-loan losses and to set up appropriate reserve accounts.
This will entail an increase in the allowance for credit losses plus the addition of a new loss allowance, or reserve, for debt securities.