NCUA’s recent addendum related to CECL model validations

In Jan. 2024, the National Credit Union Administration (NCUA) issued an addendum to the Other Supervisory Committee Audit Minimum Procedures Guide, which was originally dated Jan. 8, 2020, that replaced procedures based on recent changes in the accounting standard related to FASB Accounting Standards Codification (ASC) 326, Financial Instruments – Credit Losses, commonly known as Current Expected Credit Losses (CECL). The original guide and current addendum provide Credit Unions with the minimum procedures designed to asset supervisory committees, internal auditors, or other qualified persons in completing the areas of review outlined in NCUA regulation part 715, Appendix A, Supervisory Committee Audit – Minimum Procedures. 

All credit unions with assets of $10 million and more were required to adopt CECL for financial reporting after Dec. 15, 2022. The current addendum replaces procedures from the original Procedures Guide, dated January 8, 2020, surrounding CECL and related to investments, loans and leases portfolio, and off-balance sheet credit exposures. This article describes the updated procedures related to a model validation of the Allowance for Credit Losses on Loans and Leases (ACL) as part of the annual audit requirements.  

The NCUA addendum states (among other things) that credit unions must obtain the following documents when reviewing the CECL methodology: 

• Schedule of the ACL movements, for the testing period which includes beginning balance, total credit loss expense, charge-offs, recoveries and ending balance.
• Detailed listings of charge-offs and recoveries by month.
• Management’s support of the ACL calculation.
• Board of Directors approved ACL Policy.
• CECL model—The simplified CECL tool, third-party CECL tool, or internally developed models for the periods under audit.