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FASB Answers the Million-Dollar Question: What Is the Effective Date for Credit Losses (CECL)?

MAshley By Melissa Ashley, Executive Vice President and Chief Financial Officer

December 14, 2015 -- During our Member Connect Summits, which took place October 20-22, we highlighted the Financial Accounting Standards Board (FASB) project to overhaul the guidance for credit losses using the current expected credit loss (CECL) model. In a meeting on November 11, the FASB answered the question for when the forthcoming standard and its sister project on classification and measurement will be effective; the FASB also determined the dates for leases.

We know this issue has been top of mind for many of you, accounting professionals in particular, and we just wanted to follow up with some recent information from Crowe Horwath regarding the new effective dates. To read a recent article on Crowe Horwath’s website, which discusses the results of the FASB’s meeting, please visit the following link: FASB Answers the Million-Dollar Question: What Is the Effective Date for Credit Losses (CECL)?

CECL Implementation Do’s*

  • Become familiar with the standard and draft a CECL plan
  • Discuss the proposed accounting changes with external auditors, industry peers and regulators
  • Develop multidisciplinary teams in preparation for implementation
  • Review current ALLL and credit risk management practices to identify possible processes that can be leveraged to adopt the new standard
  • Consider data availability (e.g., origination, maturity dates, charge-off dates, life time loss amounts)
  • Use industry available resources
  • Consider capital adequacy
  • Keep your regulator up to date

CECL Implementation Don’t’s*

  • No early incorporation of “expected loss” concepts or “soft adoption”
  • No artificial inflation of ALLL to smooth impact
  • Don’t wait to prepare
  • Don’t overload at adoption

*As noted by Crowe Horwath in our Member Connect Summits

Reviewing the CECL model*

Recognize an allowance for expected credit losses on financial assets

  • Expected Credit Loss is defined as:
    • “An estimate of all contractual cash flows not expected to be collected from a recognized financial asset (or group of financial assets) or commitment to extend credit.”
  • Considers more forward-looking information than is permitted under current U.S. GAAP
    • Based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the expected collectibility of the financial assets’ remaining contractual cash flows
    • Includes quantitative and qualitative factors specific to borrowers and the economic environment in which the entity operates. In addition to evaluating the borrowers’ current creditworthiness, the assessment includes an evaluation of the forecasted direction of the economic cycle
  • Departs from the incurred loss model which means the probable threshold is removed
    • Removes the prohibition on recording day one losses

*As noted by Crowe Horwath during our Member Connect Summits