CECL, or current expected credit loss, is a new accounting standard that estimates expected credit losses by using historical information, current conditions and reasonable forecasts. CECL is considered one of the most significant accounting changes in decades to affect entities that borrow and lend money.
Larger allowances will be required for most products.
Modified product pricing
Pricing of products will change to reflect higher capital cost.
Both data collection and modeling methodology will be impacted.
What is CECL?
The CECL model is the new Financial Accounting Standards Board (FASB) standard for estimating and measuring credit losses for loans and debt securities. CECL is a change from the current incurred-loss model and brings with it significantly greater data requirements, including historical data for the life of the loan.
Preparing for and implementing CECL will compel financial institutions to think about credit risk in new and more timely ways and to either recalibrate existing models or develop new ones. Critical components to manage during CECL implementation include data preparation, loan segmentation, methodologies selection and process validation.
How much time do you have?
CECL has different effective dates based on the type of reporting entity. Public business entities that file financial statements with the Security and Exchange Commission will have to comply by 2020, non-SEC registered companies must comply by 2021 and non-public entity banks, including most credit unions, have until 2022 to adopt the new standard.
What is CECL replacing?
CECL replaces the current Allowance for Loan and Lease Losses (ALLL) accounting standard. Under CECL, entities are required to account for expected losses over the estimated life of the loan, while the existing model relies on incurred losses.
The FASB has high hopes for CECL, stating that the new standard will improve “financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations."