The CECL Approach, 2 of 3

Tom Van Lenten, CPA, CFO Consulting Partners LLC

This is the second in the CFO Consulting Partners series of articles analyzing the new FASB Standard on accounting for credit losses (ASU 2016-13). Click here for the first article in the series.

It has been more than a year since the FASB issued ASU 2016-13 Click here for article . The new Standard is most commonly referred to as CECL, which is an acronym for “Current Expected Credit Losses”. The CECL standard requires an entity to recognize a forward-looking estimate of the expected credit losses in the Allowance for Loan and Lease Losses (ALLL), when an asset is booked. Current GAAP requires that the estimate of credit loss is based on incurred losses and banks typically historical losses as the basis for the calculation

CECL is one of the largest and most complex accounting standard implementations ever undertaken in the banking industry. Despite this, many banks have not begun urgent and focused execution of CECL implementation plans. Privately-held companies can see the long transition timeline (implementation is required at January 1. 2021 for non-SEC filers) as a reason for delay. However, public entities must react faster. They are required to include disclosures in their first SEC filings after issuance of ASC 2016-13 on June 16, 2016. The FASB has recently highlighted this disclosure requirement by issuing ACU 2017-3 in January 2017 which gives additional guidance for certain disclosures of standards that are issued but not yet implemented for SEC filers.

  • The basic requirements of ASU 2017-3 are:
    if an SEC filer does not know or cannot estimate the financial impact from adoption of a new ASU it should make a statement to that effect and should consider additional qualitative disclosures to assist the reader in assessing the impact that the standard will have
  • the ASU also requires additional qualitative disclosures to include a description of the effect of the accounting policies that the SEC filers expect to apply together with a comparison to their current accounting policies,
  • additionally, SEC filers should describe the status of the process to implement CECL and the significant implementation matters yet to be addressed.

In a recent informal survey of financial institutions by MST Click here for article covering the implementation of CECL, 5% of the respondents said that they have not yet begun preparation for CECL implementation, and 87% have only held internal discussions about CECL implementation. One experienced CFO has been quoted as saying, “the commonly followed CECL implementation strategy of waiting for other banks to report first is in fact dangerous.”

Considering the size and complexity of CECL implementation we agree that delay is a high-risk approach and that thoughtful planning now will yield significant benefits.

  • The major elements of CECL implementation include:
  • Analysis of CECL impacts on the bank,
  • Project management,
  • Credit modeling,
  • Accounting Policies,
  • Operations,
  • Systems integration [click here for a case study of a CFO CP systems integration].

In our next newsletter, we will discuss further considerations in CECL implementations.