JPMorgan, Citi critique FASB’s credit losses fix

The Financial Accounting Standards Board’s proposed update of current expected credit losses standards has drawn mixed feedback — with JPMorgan and Citibank delivering two of the stronger critiques.

“JPMorgan Chase does not believe the FASB’s objectives for this project have been met, and its costs do not outweigh the perceived benefits. As such, the Firm does not support the Proposed Update,” JPMorgan Managing Director Rebecca Carey wrote in a Sept. 20 letter to the FASB Technical Director Hillary Salo.

In total the FASB has received 34 comment letters on its proposal, with those from the two big banks and a number of others trickling in well past the stated Aug. 28 end date for the public comment period. The board is expected to take the later responses into account.

At its core, the new accounting proposal is designed to simplify ASU 2016-13, governing how companies account for credit losses on various financial instruments (Topic 326). The tweak also sought to address complaints that current standards counterintuitively resulted in banks reporting more losses when they bought performing loans than when they bought weakening ones, CFO Dive previously reported.

Under current generally accepted accounting principles, if a purchased financial asset has had a significant deterioration in value since origination, it is accounted for under what is called a purchased credit deteriorated model, also known as the gross-up approach, with no loss recorded on acquisition.

But if the assets had not seen a big decline in value, a so-called day-one credit loss would be recorded which some companies did not like. With the new proposal, there would be one “gross up” accounting model used for nearly all assets and there would be no credit loss recorded on acquisition.

JPMorgan’s Carey acknowledged that the earnings recognition related to the day-one credit losses presented challenges to institutions making acquisitions shortly after CECL was initially adopted. But that aspect of CECL is now well understood, she wrote, and the bank encountered no confusion when JPMorgan had to explain its accounting to analysts and investors as part of the company’s recent First Republic Bank transaction.

In May JPMorgan stepped in to assume most of First Republic Bank’s assets after regulators closed the bank.

The solution as proposed in the update is effectively too onerous, she asserted. “The Proposed Update significantly revises the current application of CECL and will require adjustment to credit loss forecasting models and re-design of accounting systems. Further, the Proposed Update’s modified retrospective adoption method presents a significant operational burden and cost because it impacts numerous elements of the financial statements and requires assessment of loan-level history in order to determine the restatement,” Carey wrote.

Citi’s Daniel Palomaki, head of accounting policy at the bank, described his concerns in somewhat measured terms, as outlined in a Sept. 18 letter.

“Citi does not believe the update, as proposed, resolves the financial reporting issues highlighted above, and adoption of the update would be both costly and time-consuming, given the operational complexities that arise from the proposal,” he wrote.

Further, expanding the use of the gross up accounting model would unnecessarily complicate the treatment of assets to which the model is rarely applied, such as for credit cards and other revolving credit arrangements, he wrote.