Article written by:
Gary Condit, CPA
Director, Assurance & Business Advisory Services
New Accounting Standard – CECL
I have observed a number of different approaches from credit unions in how they are addressing the upcoming required implementation of the new accounting requirement for the allowance for loan loss more commonly referred to as CECL. These approaches range from not doing anything yet and hoping it will go away, to purchasing sophisticated software that assigns loss probabilities to every loan in their portfolio.
Everyone selling solutions seem to be touting their product as the answer to CECL. Please find in the following paragraphs some very important information regarding CECL which I believe credit unions need to be aware.
The FASB pronouncement is very clear that it does not specify a single method for measuring expected losses. The Board of Governors of the FRB, the FDIC, the NCUA and the Office of the Comptroller of the Currency also issued a joint statement on the new accounting standard on June 17, 2016. (See the NCUA’s Supervisory Priorities for 2019 document here.)
The initial views of the regulatory authorities, as included in the joint regulatory, statement clearly indicate their understanding of the notion that the new accounting standard does not specify a single method for measuring expected credit loss; rather, institutions should use judgment to develop estimation methods that are well documented, applied consistently over time, and faithfully estimate the collectability of the financial assets by applying the principles of the new standard.
The joint statement further states: The new accounting standard allows expected credit loss estimation approaches that build on the existing credit risk management systems and processes, as well as existing methods for estimating credit losses. However, certain inputs into these methods will need to change to achieve an estimate of lifetime credit losses. In addition, institutions will need to consider how to adjust historical loss experience not only for current conditions, as is required under the existing incurred loss methodology but also for reasonable and supportable forecasts that affect the expected collectability of financial assets.
Nevertheless, taking these factors into account, the agencies expect that smaller and less complex institutions will be able to adjust their existing allowance methods to meet the requirement of the new accounting standard without the use of costly and complex models.
I have developed a cost-effective consulting engagement to help credit unions evaluate the data that they have available to them and possible approaches in their CECL implementation. GBQ’s credit union team can also assist with what data you need to be accumulating between now and the 2021 implementation date to assure you are ready.