Understanding the CECL – How Does It Affect You?
Written by Scott Stevens, CPA, CGMA
FASB Issues New Guidance on Accounting for Credit Losses
The Financial Accounting Standards Board (FASB) recently issued a new accounting standard that will change the way financial institutions calculate their expected allowance for credit loss. Currently, the Allowance for Loan and Lease Losses (ALLL) model is based on incurred losses and investments are considered impaired when there is a high probability that future cash flows for a given contract will not be realized under the original terms. However, beginning after December 15, 2021 for most private companies, that model will take a more forward-looking approach. No longer will financial entities simply rely on credit losses that are “probable.” They will need to look at the entire life of the loan, rather than just one year, to account or predict for loan losses.
What does this mean for you? While it seems as though the effective date is still a long time from now, there are steps you can take to be prepared for this change. First, as with any change, credit unions should start trying to understand what data they will need to gather. This will help management formulate a plan of action for how the data will be gathered and if any modifications need to be made to existing information systems. The main point to emphasize is that each institution will need to start gathering as much information about its loan portfolios as it can. BMSS professionals can help you understand this new guidance as well as help determine what data needs to be gathered and how to implement a plan of action. Building up a solid history of detailed data will provide more flexibility and resources to adjust for the coming changes.
While it may seem cumbersome and has garnered some criticism, the new standard is intended to improve financial reporting by requiring timelier recording of credit losses on loans so that financial entities are better prepared to handle a crisis, should it arise. According to FASB Chair Russell G. Golden, “The new standard addresses concerns from a wide range of our stakeholders – including financial statement preparers and users – that the existing incurred loss approach provides insufficient information about an organization’s expected credit losses.” (Full article.) One important thing to take into consideration, however, is this, “Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances.” (ARM Special Alert – FASB Issues New Guidance on Accounting for Credit Losses, CCH Accounting Research Manager News, June 16, 2016)
If you would like more information about this standard or how to prepare for it, please contact your BMSS professional at (205) 982-5500 or go to www.bmss.com.
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