Credit Impairment and CECL Framework

CECL: Confronting Both Immediate Concerns and Extended Impacts

The new Financial Accounting Standards Board (FASB) standard for estimating expected credit losses means that banks must now calculate credit impairment using a more forward-looking approach. Replacing the incurred loss model with the current expected credit loss (CECL) model means that the “probable” threshold will be removed and banks will need to consider expected prepayments when estimating the expected life of a financial asset.

But the impact of the new standard extends far beyond accounting and financial reporting alone. In addition to changing the way they calculate the allowance for loan and lease losses (ALLL), financial institutions will need to consider making process changes in the way they collect data and either adapt their existing financial models and frameworks or develop new ones altogether.

Crowe Horwath LLP specialists have been closely engaged throughout the extended FASB deliberations that led to the new standard. By staying abreast of developments, Crowe can help banks address these new concerns and adapt to the new requirements.

Making the CECL Transition:
 
making the cecl transition


Important considerations as your bank moves towards CECL implementation.

Effective Dates and Expected Timing

For the CECL standard, the FASB had created a subgroup of public business entities (PBEs) that do not meet the definition of a “Securities and Exchange Commission (SEC) filer” contained in U.S. generally accepted accounting principles (GAAP), and the effective date for those entities is later than the date for the PBEs that are SEC filers.

The effective dates that were decided previously were extended by one year as follows:

  • PBEs that meet the definition of an SEC filer: fiscal years beginning after Dec. 15, 2019 (instead of 2018), including interim periods within those fiscal years
  • Other PBEs: fiscal years beginning after Dec. 15, 2020 (instead of 2019), and interim periods within those fiscal years
  • All other entities: fiscal years beginning after Dec. 15, 2020 (instead of 2019), and interim periods within the fiscal years beginning after Dec. 15, 2021 (instead of 2020)

The FASB reaffirmed its decision to permit early adoption for all entities for fiscal years beginning after Dec. 15, 2018, including interim periods within those fiscal years, which is consistent with the effective date that originally was agreed upon for PBEs.

The final Accounting Standards Update (ASU) was published on June 16, 2016.

Five Areas That Will Be Affected

The new FASB standard adds further complexity to the intense scrutiny that is already given to financial institutions’ ALLL methodologies, policies, and procedures. Banks will need to make significant adaptations to their reserve calculation processes to accommodate the new CECL model. 

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Switching to the CECL-based model can affect the credit portfolio management function. As banks adapt their portfolio management solutions to accommodate the new standard, they must consistently and actively monitor, analyze, and manage the portfolio in a way that continues to improve income and capital use.

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The new CECL-based standard directly affects numerous aspects of banks’ credit risk management programs. In addition to directly affecting risk assessment processes and credit recommendations, the new standard can affect structural and operational components of credit risk management.

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Accurate, reliable, integrated, and accessible data is a fundamental requirement for effective credit management, accounting, and financial reporting. Banks can expect to encounter complex challenges as they redefine their data management requirements and expectations to support compliance with the new FASB standard.

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Adopting a new credit impairment model will inevitably have an impact on model risk management. As banks explore how to adapt to the new credit impairment model, they will also need to reassess their model risk management approaches and implement new processes that reflect the new CECL model.

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