In 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update that adopted Current Expected Credit Loss (CECL) as an accounting treatment for loans held by banks and other credit lending institutions.  However, the lending institution SoFi uses an also accepted GAAP treatment of Fair Value (FV) accounting.  This has led to a disparity between earnings and capital requirements reported by SoFi and other lenders.

These differing accounting standards result in an inability for investors and market analysts to compare banks.  In the case of SoFi, if CECL methods were used, the reported earning per share would be $2 vice the $3.42 that was reported.  Additionally, if CECL were used, the lender would not have met the risk-based capital ratios to become a bank.

In the life of a loan, the accounting value has no difference.  The gains initially realized by FV are much less later in the life of a loan, whereas CECL shows better numbers later.  The author also points out the because the ways to determine FV are so opaque, it introduces the "potential for 'gaming' into accounting."  They also point out that the "period-to-period capital volatility...should concern regulators.

The differences in the accounting styles make an uneven comparison between SoFi and other lending institutions.  It results in better earnings and less need for on-hand capital to shore up potentially bad loans.  And while it is not illegal, it seems an unfair advantage over similarly structured firms.

 

What are some immediate advantages or disadvantages to a company using Fair Value accounting instead of Current Expected Credit Losses?

What are the market effects of having two different accounting treatments for firms that hold loan assets?

What changes would you make to ensure market and investor information parity?