FAQ 1: CECL Implementation
The What, When and Whys of CECL Implementation

People in Classroom Raising Their Hands
It is difficult to know where to start with CECL. So, we provide you with the answers to some of the first questions you may be asking.

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.

On July 17, 2019, FASB voted unanimously for a proposal to delay CECL for all but the largest public financial institutions to Q1 2023. Although there is a 30-day comment period in August, this proposed delay is expected to take effect. Any bank can adopt the CECL standard early, beginning in 2019. Regardless, it is important for financial institutions to begin planning for the CECL transition immediately.

The FASB, including various stakeholders, determined in response to the global economic crisis that the current approach used for measuring impairment of financial assets, the ICL model delays the recognition of credit losses and overstates assets. The ICL model does not permit a loss that is recognized until it is determined that a loss is both probable and estimable. This process limits the loss estimate to current, objective evidence and ignores future expected events. As a result, incurred loss estimates serve better as a lagging indicator of impairment losses rather than a leading indicator of expected asset performance.

According to Federal banking regulators, CECL will not only affect how financial institutions calculate credit loss reserves, but also how organizations fundamentally manage their allowance for loan and lease losses (ALLL) and organizational processes for both finance and risk management. The scope of these changes can be substantial depending on the complexity of the balance sheet. The changes required by CECL require a much deeper level of modeling, analysis and reporting than what has previously been required. These are significant changes for banks as they will need to manage risk and financial data, build analytic platforms and share information between departments. The impact of FASB's CECL standards is expected to be significant.

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.

No, Federal bank regulators suggest everyone should be looking into CECL now. Rather than waiting until closer to implementation deadlines, PCBB's recommendation is to begin preparing now by examining various methods and archiving loan-level data. The more time you have to understand the various allowable methods and analyze your data, the more options you may have to select the ideal methods for CECL.

The short answer is no. FASB rules apply to all institutions equally. The analysis required will also be the same. The only differences that will likely exist in the end will be with respect to the definition of similar loan groupings as well as issues related to determining life of asset.

Community bankers, which traditionally focus on real estate finance, will need to do additional work with respect to loans that lack highly similar repayment characteristics (CRE and Multifamily versus Single Family). Many times commercial real estate transactions are referred to as deals versus loans which would be an indication that they lack similar repayment characteristics and thus will need to use component versus loss rate methods.

Additional CECL FAQs

  1. The Impact of CECL for Financial Institutions
  2. The Optimal CECL Approach for Financial Institutions

Additional CECL Resources