Dive Brief:

• The Financial Accounting Standards Board has tentatively agreed to advance a proposal to streamline existing rules related to the current expected credit losses standard issued in 2016 under which the FASB sought to foster timelier reporting of financial losses after concerns about delays in recognizing deteriorated asset values rose out of the financial crisis in 2008.
• The new proposal would require companies to use a single so-called “gross-up” accounting model when reporting purchased financial assets such as equities, loans and debt securities, whether they are acquired through business combinations or outright asset acquisitions, according to a release on the Feb. 28 meeting decision. 
• Under current generally accepted accounting principles, there are effectively two models for reporting such assets depending on whether the assets are deemed healthy or deteriorated, CFO Dive previously reported. With the new proposal there would be no credit loss recorded on acquisition.

Dive Insight:

The proposed change stems from a post implementation review that the FASB undertakes to revisit how new standards work after they go into effect. The decision comes after the board heard mixed feedback during the public comment period last year on the planned update. 

Before voting for the change, Board Member Fred Cannon noted that concerns about the implications of the regulation and the so-called “double-count” of credit were among the issues that the board has heard significant feedback on. A quirk in the standard led some banks to “double count” losses on healthy loans when they bought or merged with other banks, Bloomberg Tax reported.

“I do view moving forward on this as a critically important part of the...process,” Cannon said. “In my view we’re supposed to look at the outcomes from standards and where those outcomes are not intuitive...and where they’re not in line with what the board originally intended it’s on us to make some adjustments.”  

FASB Chair Richard Jones, who also voted for the change, said an alternative option to the change that would have called for disclosures to explain the different methods used to account for the assets would not have solved the underlying problem with the CECL standard.

“I haven’t seen a lot of acquisitions where companies have identified, even with large portfolios, ‘Here’s my bump up in earnings that I expect to occur each period in the future,’” Jones said. “They’re buying earnings and do they really transparently show that or should our accounting model reflect that? I think it’s better if our accounting model reflects that.”