Here’s a New Year’s resolution you may want to keep: Get your financial institution up to snuff on the Financial Accounting Standards Board’s slew of new rules coming out in the years ahead, including those dreaded changes in calculating credit losses.

Amongst other things, banks will have to report changes in equity investments on their income statements, book long-term operating leases on their balance sheets and move to an expected credit losses model for calculating loan-loss reserves.

With respect to that first one, if an equity security experiences a decline in value, for instance, the bank’s earnings could take a hit, said Alan Lloyd, a senior audit manager with the firm Wolf & Co. But just how significant this rule will prove obviously depends on a bank’s level of investment in equities – that is, if they’ve invested at all in those types of securities.

“Certain banks seem to have more of an equity investment than others. The research we did indicates that after the financial crisis, banks generally reduced their equity holdings to some extent, so I think banks should be looking at their level of investments in equity securities and stress testing those, probably using scenarios of up to 30 percent declines,” Lloyd said. “If something like that were to happen, could they withstand the hit to capital and would it be material enough to them that they might want to divest some of the holdings in those types of investments?”

Generally speaking, larger banks are more likely to have some type of equity investments, but a dip in the value of those equities could also be less material for a larger bank than for a smaller institution, he said.

Of potentially greater concern to banks may be the FASB’s new rule concerning long-term operating leases, which historically have been disclosed in the footnotes of a bank or credit union’s financial statement. Under the new rule, which is set to go into effect beginning in December 2018, those operating leases will have to be recorded on the balance sheet as both assets and liabilities.

That could have implications for banks with large branch networks or who lease a majority of their branches, and Lloyd and his colleague Martin Caine, a CPA and member of the firm, recommend that bankers start preparing schedules and developing methodologies and models for implementing the guidance sooner than later.

While some have fretted that the FASB’s forthcoming rule on operating leases could make long-term leases (those longer than 12 months) less attractive, Caine said that may not be the case.

“There are business considerations that might counterbalance an attempt to minimize the liability. You may want to lock in a longer lease because the price is right,” he said.

But bankers may want to also take a look at their commercial clients. If and when those customers start recording operating leases on their balance sheets, that will affect those borrowers’ debt-to-income ratios.

No Time Like The Present

As if that wasn’t enough to deal with, bank accountants have also been poring over the final guidance on current expected credit losses, also known as CECL, since it was released in July.

Those rules don’t take effect until 2020, but because implementing CECL will mean gathering data and testing models and methodologies to find out which works best, experts say there’s no time like the present to start preparing.

“I would say institutions that have the greatest need to do something are the same institutions that are opting to delay,” said Neekis Hammond, a risk management consultant and CPA with the financial analysis firm Sageworks. “Those institutions with data issues and who aren’t as familiar with modeling techniques are the same institutions that are attempting to procrastinate this implementation.”

Hammond pointed to surveys Sageworks had conducted showing that roughly 75 percent of bankers want to at least execute a CECL calculation by the year’s end.

CECL will require banks to estimate the losses they expect to incur over the life of a loan at the point of origination or purchase and reserve against it accordingly. Almost all the banks surveyed recently by Moody’s Analytics indicated that they expected CECL would ultimately mean they’ll have to beef up their loan loss provisions. Until now, bankers have used the incurred loss model, but CECL will require bankers to use a whole lot more data, and that can include any changes in the bank’s lending policies or changes in the political or economic climate.

And that’s why Hammond and others are advising bankers to start getting their ducks in a row now, so they have time to find out what works and what doesn’t.

“A lot of people will tell you, get your data together and institutions interpret that to mean go get data and store it in a warehouse and that is a dangerous road to go down. It can give you a false sense of security,” Hammond said. “Until you execute a lifetime loss calculation, you don’t know what data fields you need or if those data points are accurate.”