On Nov. 15, 2019, the Financial Accounting Standards Board (FASB) updated the effective date of the current expected credit losses (CECL) standard for certain small public companies and other private companies. The revised effective dates of the standard they updated at that time are as follows.
SEC filers, excluding smaller reporting companies (SRCs): Fiscal years beginning after Dec. 15, 2019
All other entities, including SRCs: Fiscal years beginning after Dec. 15, 2022 (1)
For calendar-year entities, adoption would be required on Jan. 1, 2023.
The scope
The scope is broad and applies to many financial assets. The CECL methodology applies to the measurement of credit losses on financial assets measured at amortized cost, including:
- Financing receivables
- Held-to-maturity (HTM) debt securities
- Receivables from revenue transactions within FASB Accounting Standards Codification (ASC) Topic No. 606, “Revenue from Contracts with Customers” or ASC 610, “Other Income”
- Receivables from repurchase agreements and securities lending transactions
- Reinsurance receivables
It also applies to off balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments, except for instruments within the scope of ASC 815, “Derivatives and Hedging”) and net investments in leases recognized by a lessor.
CECL implementation process
As the incurred loss model is being replaced with the CECL model requires advance planning to calculate allowance for loan and lease losses (ALLL) more efficiently. It also brings change for your data collection processes. Our experience and tools of understanding and implementing this standard — and the requirements and deadlines that go with it — allows us to help you plan for and implement its adoption in your accounting and financial reporting and data collection.
Model validation of CECL model or parallel run review
CECL is the largest accounting change the financial sector has seen in years. One of the biggest challenges is that it doesn’t have crystal-clear guidance. If you have already implemented/adopted CECL or currently running parallel runs of CECL model, you should consider having these CECL models independently reviewed and validated.
We’ve already helped a variety of banks and financial services companies confidently validate their CECL models. We can help yours, too.
Regulatory expectations
Baker Tilly model and credit risk professionals have a deep understanding of ALLL/CECL models, including:
- Independent periodic model validation of CECL and other bank models (i.e. ALM/IRR, BSA/AML, liquidity, etc.)
- 2001 and 2006 policy statement requirements
- Prohibition of external auditors from performing under independence requirements (for institutions with more than $500 million in assets)
