CECL is coming: If you offer credit, get ready for new rules on accounting for credit losses

There’s a new credit loss accounting model coming that will impact thousands of banks and businesses in the United States. Ignore it, and you face noncompliance. Fail to comply, and you risk yet unknown penalties. 
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There’s a new credit loss accounting model coming that will impact thousands of banks and businesses in the United States. Ignore it, and you face noncompliance. Fail to comply, and you risk yet unknown penalties. The good news is you have time to prepare for the new Current Expected Credit Loss (CECL) standard, so you’ll be ready for what the American Bankers Association has called “the most sweeping change to bank accounting ever. ”  

CECL defined, and why you should care 

In the wake of the US economic crisis from a decade ago, the Financial Accounting Standards Board  (FASB) approved a new standard in June 2016 meant to limit the impact of potential losses from a future financial crisis. The FASB is an independent and non-profit organization that establishes financial accounting and reporting standards for companies that follow generally accepted accounting principles (GAAP) within the US. 

The FASB’s new CECL accounting standard requires banks, credit unions and other businesses that offer a product by credit to record both current and expected losses for the life of the loan. 

Here’s the twist: CECL mandates estimating allowances for life-of-loan credit losses at the start of the loan. 

Many view this as a dramatic change in how accounting standards determine the appropriate level of balance sheet reserves for credit losses. CECL also expands the range of data incorporated into measuring and assessing credit losses to include forward-looking information such as reasonable and supportable forecasts. 

These accounting changes raise questions about which data to collect and analyze, what methodologies and reporting formats to use to ensure compliance, as well as what penalties banks and affected businesses that fail to comply will face. 

Who needs to act, and when? 

Banks and credit unions are the organizations most associated with credit-related accounting standards, but they aren’t the only ones who need to be ready for CECL compliance.  Think of large furniture stores that do direct lending and financing. Big car manufacturers that have their own financial lending arm. Phone service providers that let you pay for your phone on credit, and retail stores that offer credit for your holiday shopping. 

These types of businesses have asset exposure and must file regulatory reports based on reporting requirements that conform to U.S. GAAP. The new CECL accounting standard applies to all of them. 

CECL takes effect in 2020 for SEC filers (with early adoption allowed), in 2021 for non-SEC filers and the end of 2021 for private companies. 

Assessing risk and facing the unknown

CECL requires companies to estimate their exposure to the credit risk they face with their current credit products. These businesses must assess their probability of default and report their allowance for loan and lease losses (ALLL) over the life of the loan. 

After the FASB approved the new accounting standard last year, some in the financial industry hoped it might go away amid the administration change in the White House. That wasn’t the case. 

CECL shows no signs of fading, but many questions remain, not the least of which is what the ramifications will be for noncompliance. 

In recent years, ICC has helped banks with the data management and technology platforms needed for the Comprehensive Capital Analysis and Review (CCAR). CCAR is an annual exercise by the Federal Reserve to assess whether the largest bank holding companies in the US have sufficient capital to continue to operate throughout times of significant economic and financial stress. 

Banks that failed their CCAR could face sanctions along with roadblocks in their M&A activity. But these penalties occurred behind closed doors and therefore don’t give us a clear idea of what CECL noncompliance penalties could be. 

The life of loan loss concept presents complexities that can decrease capital, and add both volatility to ALLL estimates and additional costs. 

How to prepare for CECL 

Think you’re ready for CECL? You’ve taken the first step by being aware of this change, which puts you ahead of many of your peers. While some companies are more prepared than others, many affected businesses haven’t even heard of CECL yet. 

Forecasting your credit loss exposure requires managing a lot of data, and the new accounting standard poses significant compliance and operational challenges.  

You’ll want to address several factors to ensure CECL compliance, including: 

  • A framework for your success path 
  • Visibility to CECL requirements, updates, and frequently asked questions 
  • Collaboration among your internal risk team, accounting team, and other key players 
  • The right platform to manage your data, along with a system of control  
  • The right methodology for assembling, analyzing and visualizing data to measure your credit loss risk 
  • The ability to flexibly extract data to fit any future prescribed reporting formats to state and show compliance

ICC is here to help 

ICC is staying on top of CECL breaking news, and we can partner with you to guide you through the process – from data aggregation, management, and governance, to data visualization, analytics, and reporting. 

We understand the Banking and Financial Services industry, along with Retail, Insurance, Manufacturing, Healthcare and other industries. We’ve helped many organizations like yours ease the burden of managing compliance. 

ICC partners with you at the intersection of experience, technology, and analytics to transform your business. If you are wondering how the new CECL accounting standard will affect you, feel free to email me

Were you already aware of CECL, and if so, how are you readying for it? What future guidance would be helpful to you?

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