An American Institute of Certified Public Accountants project that changes the way banks account for loans picked up via acquisitions has finally been completed, but it has some lawyers and accountants fearing the industry will be blindsided because most have forgotten about the long-running effort. Corporate Financing Week, and LMW sister publication, reports that the project has been on the table since 1998 and with ongoing consolidation in the industry it could have big impact, they said. The change would require banks to disclose expected cash flows from loans, meaning those without the allowances for possible bad loans that won't get paid back-potentially creating a less flattering picture to project to directors and shareholders before an acquisition.
"It's been off people's radar screens," said Sydney Garmong, an AICPA senior manager in charge of the project, who estimates final clearance from the Financial Accounting Standards Board within 60 days. Market participants are expected to be surprised by this now, he said. For M&A deals, the rule change would have a large impact, giving banks pause before purchasing other institutions with large loans or pools of loans that won't look as attractive without their allowances.
"That's a pretty big issue," Garmong said, adding that allowances will be prohibited across the board, for good loans and bad. "It could give pause to the way transactions are done," added Jeff Wishner, principal with investment bank Keefe, Bruyette & Woods, specializing in financial institutions "It would provide a new complexity in an already complex merger environment."
The project, "Accounting for Loans and Certain Debt Securities Acquired in a Transfer," would prohibit one bank from carrying over an allowance for another bank's loan. They would have to discount the loan portfolio. If a bank acquires a $1 million loan with a $100,000 allowance due to its questionable quality, for example, that purchased loan will have to be booked at $900,000. The changes will affect only purchased loans.
The project was originally issued in 1998 but has been bounced back and forth between the AICPA and the FASB for years. It was just cleared, and while the FASB has to give it final clearance, it won't require a board meeting to do that. "It's in the home stretch," said Jules Cassel, a project manager at the FASB.