CECL guidebook part 1: An introduction to the FASB financial instruments credit loss model

In June 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The standard is commonly known as the current expected credit loss (CECL) model. 

The road to CECL adoption is long and demands critical decisions be made. We recommend a “measure twice, cut once” approach to these decisions, as they’ll have long-term impacts.

What you need to know

The new standard will have a significant effect on financial institutions and, since CECL also applies to investments in debt securities, loans, trade receivables, and other financial assets, it’s also likely to impact customers.

Financial institutions need to ensure they have the resources to comply with CECL, identify the methodology they’ll use, create a plan for implementation, and gather the necessary data.

Our CECL specialists have studied the standard, spoken with regulators, and identified a few regulatory perspectives of note:   

• Smaller and less complex institutions will be able to adjust their existing allowance methods to meet the requirements of the new standard without the use of costly and/or complex modeling techniques.
• Institutions aren’t required to engage third-party vendors to assist in calculating a CECL allowance.
• The standard is scalable to all institutions.
• Inputs to calculation will change to properly implement CECL.
• Different pools can have different estimation methods.
• Aggregation and retention of data is critical.
• Current credit risk practices can still be used.

The road to CECL adoption is long and demands critical decisions be made. 

Adoption timeline

SEC filer adoption

Public business entities that meet the definition of an SEC filer will be required to apply the guidance for fiscal years beginning after Dec. 15, 2019, including interim periods within that year. Therefore, adoption must be in place for the March 31, 2020, Form 10Q filing for companies operating on a calendar year with impact measured as of Jan. 1, 2020.

Non-SEC filer but public business entity

Public business entities that don’t meet the definition of an SEC filer will be required to apply the guidance for fiscal years beginning after Dec. 15, 2020, including interim periods within those fiscal years. Therefore, adoption must be in place for the March 31, 2021, call report filing for companies operating on a calendar year with impact measured as of Jan. 1, 2021.

Nonpublic business entities

All other entities operating on a calendar year must measure the impact as of Jan. 1, 2021 and adopt the guidance for the Dec. 31, 2021, call report and financial statements.

Begin now

Don't let the perceived complexity of CECL overwhelm you — but, don't wait to begin planning for adoption either. Some smart ways to begin include:

• Train your board and/or audit committee on key aspects of CECL and timeline for adoption.
• Hold management team meetings to review options and long-term impacts of decisions.
• Develop a timeline and adoption roadmap.
• Gain management direction and consensus on the selection of methodologies and loan pools.
• Evaluate software service providers, if deemed necessary.
• Develop a CECL accounting policy, which will reflect the assumptions and methods used.
• Develop and document processes, procedures, and internal control related to the new methodology.