The current expected credit loss (CECL) is a new GAAP accounting standard that will change how depository financial institutions of any size will account for expected credit losses. CECL requires financial institutions to record “life of loan” loss estimates at origination or purchase. This will replace the current “incurred loss” (ICL) accounting model.
CECL eliminates the requirement to defer the recognition of credit losses until a loss is probable; consequently, applying this model will result in earlier loss recognition. All banking regulators have indicated it intends for the CECL model to be scalable for all depository institutions, regardless of their asset sizes.
As mentioned previously, with the CECL model, the FASB will remove the probable and incurred criteria under current guidelines and replace them with a lifetime expected credit loss concept. CECL will extend the timeframe covered by the estimate of credit losses by including forward-looking information, such as “reasonable and supportable” forecasts, in the assessment of the collectability of financial assets.
The CECL model will institute a single credit loss model for all financial assets, both loans and securities carried at amortized cost. This means that CECL will change the accounting for the allowance for loan and lease losses associated with held-for-investment loan and lease portfolios, as well as the other-than-temporary impairment of held-to-maturity securities.