In November, the SEC published Staff Accounting Bulletin (SAB) 119 to align the commission’s guidance with the FASB’s new credit loss standard, which is effective in 2020 for large public companies that file with the SEC. SRCs registered with the commission, private companies, and not-for profit organizations have more time to implement the revised accounting rules. SAB 119 updates staff guidance about methodologies and supporting documentation for measuring credit losses.
In 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires banks and other lenders to look to the future, make reasonable and supportable estimates, and calculate potential losses on loans and certain securities as soon as they issue them and set aside corresponding loss reserves. This current expected credit loss (CECL) model is different from what banks use today under the incurred loss model, which require them to write down losses after borrowers have essentially defaulted on their payments.
The updated guidance in SAB 119 continues to focus on the documentation the staff would normally expect registrants engaged in lending transactions to prepare and maintain to support estimates of current expected credit losses for loan transactions. SAB 119 is applicable when a company adopts ASU 2016-13.
SAB 119 adds Section M to Topic 6 of the SAB Series which delves into four topics and responds to seven commonly asked questions, including the following:
- Measuring current expected credit losses
- Development, governance, and documentation of a systematic methodology
- Documenting the results of a systematic methodology
- Validating a systematic methodology