Current Expected Credit Loss (CECL) Insights

Protiviti IT Governance & Risk Management

Current Expected Credit Loss (CECL) Insights


The final CECL accounting standard has impacted numerous functions within financial services institutions and other organizations. The public filers are now in the later stages of their CECL implementation plans. The effective date for the standard is fast approaching and the overall effort, including model parallel run, creating financial statement disclosures and documenting process and controls, requires continued careful thought and execution. Affected organizations face several challenges in regards to the CECL accounting guidance but the main areas of impact are data and IT systems, methodology and modeling, business processes, accounting, disclosures and reporting, SOX controls, and internal audit.

Protiviti has a team of professionals with deep experience in financial services, reserving, and operationalizing complex processes to help your organization meet CECL implementation timelines.


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No Stone Unturned: Key Considerations for Finalizing CECL Model Implementation & Model Validation

CECL 2019

CECL Implementation Dates:

  • All entities may early adopt after fiscal years beginning December 15, 2018
  • CECL is effective for public business entities that are SEC filers, excluding smaller reporting companies, for fiscal years beginning after December 15, 2019
  • CECL is effective for all other public business entities, including smaller reporting companies, for fiscal years beginning after December 15, 2022
  • CECL is effective for private companies and nonprofits for fiscal years beginning after December 15, 2022

Recent Developments:

FASB Approves Proposal to Defer Effective Dates for CECL Standard

  • On October 16, 2019, the FASB voted to approve proposals to delay the effective date of implementation for the CECL accounting standard. The changes would extend the dates for smaller reporting companies and all other public business entities from January 2021 to January 2023, and for private companies and nonprofits from January 2021 to January 2023.

FASB Extends CECL Deadline for Some Lenders

  • On July 17, 2019, the FASB voted to extend the deadline for compliance with the Current Expected Credit Losses (CECL) accounting standard (Topic 326) for public business entities (PBEs) that are not SEC filers, including smaller reporting companies (SRCs), private companies, non-profits, and employee benefit plans. For these companies, the effective date will begin after December 15, 2022, including interim periods within those fiscal years. For PBEs that are SEC filers, excluding SRCs, the effective date will continue to begin after December 15, 2019.

FASB Issues Narrow-Scope Improvements to Financial Instruments Standard

  • On April 25, 2019, the FASB issued Accounting Standards Update (ASU) No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, that clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement.

Industry appeals for changes to CECL continue

  • April 3, 2018 - FASB Rejects Alternate CECL proposal by Banks:
    • On April 3, 2019, (concurrent with regulator interagency issuance of SR Letter 19-8: Frequently Asked Questions on the Current Expected Credit Losses Methodology (CECL), the FASB rejected regional bank proposal wherein regional banks had asked that the credit losses forecasted beyond 12 months be recognized in other comprehensive income, rather than in earnings, as CECL requires. As such, banks will be required to record expected losses when they make loans.
    • The FASB also voted that disclosure of gross charge-offs and recoveries by vintage is not required but noted further discussion would occur.
  • December 11, 2018 - U.S. House Committee on Financial Services debated cost and benefits of CECL with industry experts that concluded with consensus on need for:
    • The FASB to conduct an industry-wide cost-benefit analysis on the impact of CECL to the financial services industry before the required effective date.
    • Provide some form of regulatory capital relief to avoid penalizing banks for the impact of CECL adoption on regulatory capital ratios.
  • January 28, 2019 FASB - The FASB’s Transition Resource Group (TRG) held a roundtable and discussed the following CECL implementation issues:
    • Topic 1: Proposal Submitted to Consider an Alternative Approach to Presenting Expected Credit Losses on the Income Statement wherein the proposed approach would retain the CECL methodology’s intent of establishing an allowance for the lifetime of an asset on the balance sheet, but recognize the provision for credit losses in three parts:
      • For non-impaired financial assets, loss expectations within the first year would be recorded to provision for losses in the income statement with
      • Loss expectations beyond the first year recorded to Accumulated Other Comprehensive Income ("AOCI'') and
      • For impaired financial assets, lifetime expected credit losses would be recognized entirely in earnings.

Outcome Summary - Unlikely to be adopted due to:

  • Need for enhanced disclosure requirements to make the additional information provided by the proposal decision-useful.
  • The proposal’s increased reliance on management estimates and judgements could decrease comparability.
  • Auditors at the roundtable noted that the proposal would lead to an incremental increase in audit effort (and cost) and increased scrutiny of the judgements made by the entity in determining credit losses in the next 12 months and those beyond 12 months in the entity’s impairment analysis.
  • Topic 2: Whether Gross Writeoffs and Gross Recoveries Should be Presented in the Credit Quality Disclosures

    Outcome Summary - Likely to be adopted due to:
    • Investors reiterating the importance of the vintage information to track the performance of certain parts of the portfolio over time.
    • Alignment with original intent and language in the CECL guidance. While the standard currently does not include language on recoveries and write-offs, it does state that “When disclosing credit quality indicators of financing receivables and net investment in leases (except for reinsurance receivables and funded or unfunded amounts of line-of-credit arrangements, such as credit cards), an entity shall present the amortized cost basis within each credit quality indicator by year of origination (that is, vintage year).”

U.S. Securities and Exchange Commission recently issued CECL clarifications and guidance:

  • Assessing Loans for Charge-Off:
    Loans may be assessed loans at the individual loan level for charge-off determination as the loans retain their individual characteristics, even though CECL requires pooling loans with similar risk characteristics to determine the allowance.
  • Determining Loan Collectability:
    While CECL is silent on approaches to assess collectability, all relevant information should be considered when deciding whether or not a loan is uncollectable. including individual loan information and portfolio-level information.
  • Subsequent Events (ASC 855):
    Where information may be received after the balance sheet date (but before financial statement issuance) that could be significantly different from management’s original expectations, the following conclusions were reached:
    • Loan-specific information about conditions that exist at the balance sheet date should be considered.
    • Information that is not loan-specific (e.g., the U.S. government’s announcement of unemployment rates) received after the completion of the estimation process should not be recognized, unless the information results in an identified deficiency in the institution’s CECL calculations, thus requiring the information to be included.
    • Information relating to forecasting assumptions received before the completion of the estimate process could be included if management chooses to do so, unless the information results in an identified deficiency in the institution’s CECL calculations, thus requiring the information to be included.

Regulatory Guidance Updates

  • Federal Reserve Board - CECL Capital Impact Three-year Transition Period
    On February 14 ,2018, The Federal Reserve Board approved a final rule, effective April 1, 2019, to provide the ability to phase in the day-one regulatory capital effects of CECL adoption over three years.
  • U.S. Securities and Exchange Commission (SEC) - SAB 102 Update
    In December 2018, the SEC announced that Office of the Chief Accountant is updating Staff Accounting Bulletin (SAB) 102, Selected Loan Loss Allowance Methodology and Documentation Issues (originally issued on July 6, 2001), to better align its guidance with the relevant concepts for an expected loss measurement model as a result of the FASB's standard on current expected credit losses ("CECL"). It was also noted that procedural discipline and documentation applicable under the incurred loss model will continue to be relevant under the new standard.



    On-Demand CECL Training Resources:

    Ariste Reno
    Ariste Reno
    Managing Director
    +1 312-476-6398