‘Measurement of Credit Losses’ Standard: Delays Expected

Ever since the Financial Accounting Standards Board (FASB) issued new accounting guidance for measuring and recognizing credit losses, accounting professionals and businesses alike have grappled with developing an implementation plan for such a significant shift. As a result, the FASB has issued additional accounting standards updates to provide clarification, technical guidance, and transition support for those tasked with implementing the accounting standard.

Here’s why the change is such a big deal. Currently, the generally accepted accounting principles in the United States (U.S. GAAP) require an “incurred loss” methodology for recognizing credit losses. This approach generally delays loss recognition until it is probable that a loss has been incurred.

The new guidance, when effective, will require a current expected credit loss (CECL) methodology to establish an allowance for credit losses. This approach will require the measurement of all expected losses of a financial asset. Further, the measurement of the allowance for credit losses will necessitate the use of current conditions, reasonable and supportable forecasted information, and historical loss experience in order to estimate future credit losses. In other words, the new standard will require entities to establish on their balance sheets an allowance for credit losses that represents all expected future losses, at any given reporting date, by utilizing past, present, and future forecasted information.

While this new guidance affects all entities, its effect on the buy here – pay here (BHPH) industry may be significant: The allowance for credit losses is generally the largest and most significant estimate a BHPH operator makes in the financial statements. The BHPH community is justifiably concerned with ensuring they have the appropriate policies, procedures, and systems in place in advance of the effective date.

But, there is good news. Though the changes are substantial, there is still time to prepare. As of this writing, public companies are required to comply with the new standard for fiscal years beginning after Dec. 15, 2019 (2020 calendar year-ends). Nonpublic entities are required to comply for fiscal years beginning after Dec. 15, 2021 (2022 calendar year-ends).

However, despite the issuance of many technical corrections and subsequent amendments to the new accounting rule for credit losses, the FASB determined that more time may be needed to give nonpublic entities sufficient information and resources to effectively implement the updated standard. Therefore, in July of 2019, the FASB voted to propose further delay of the effective date for nonpublic entities to Jan. 1, 2023.

The proposal, which is anticipated to pass this year, was driven by feedback from the business community. They expressed concerns about the relatively short timing of implementing the many significant accounting standard changes passed recently by the FASB – such as revenue recognition and accounting for leases – which both precede the effective dates of this credit loss standard. The FASB indicated that having more time between the effective dates for public entities and nonpublic entities would allow nonpublic entities to learn from the transition issues described in large public company filings and SEC comment letters. Additionally, it would give third-party solution providers more time to catch up to the new standard.

One thing seems certain: Though the adoption of this standard will be difficult for many public and nonpublic entities, the BHPH industry is impacted more than most other industries, with few exceptions. If the FASB proposal passes, the additional time to prepare for the new standard will be welcome news to many. As public companies work through unanticipated issues of adopting this standard for credit losses over the next year, the FASB will likely continue to publish updates, amendments, and practical expedients to assist nonpublic companies once the rule becomes effective for them.

Despite the fact that the effective date for most BHPH entities is likely to be delayed, dealers should continue working with their accountants now to ensure they are adequately prepared for this updated standard.