Tammy joined D+H in 1995 and focuses on compliance issues affecting lending, core, retail and self-service solutions. Tammy served on the Colorado Council of Advisors on Consumer Credit and is a member of the Colorado and American Bar Associations. She received her Juris Doctorate from the University Of Colorado School Of Law in Boulder and graduated cum laude with a Bachelor of Science – emphasis on accounting – from the University of Northern Colorado.
You are hereResourcesOur Viewpoints5 Top Considerations to Plan for when Implementing FASB’s CECL Model
The Allowance for Loan and Lease Loss (ALLL) calculation has traditionally been a cumbersome process, combining complex data analysis with antiquated technologies. However, what once lived on a spreadsheet and was decipherable only by a few financial analysts, will no longer suffice under the adopted Current Expected Credit Loss (CECL) model for calculating ALLL. CECL requires a forecasting methodology that relies on extensive historical data – and an avenue to effectively automate the collection and analysis of such data.
A New ALLL Calculation Approach with Far-Reaching Impact
The FASB (Financial Accounting Standards Board) issued the final standard on June 16, 2016 with an effective date of December 15, 2019, for public entities that are required to file reports with the SEC and December 15, 2020, for non-filers. The Accounting Standards Update, Financial Instruments—Credit Losses (Subtopic 825-15), replaces the existing incurred loss model with the CECL model for calculating the ALLL. This change, from an impairment analysis to a forecast of life-of-loan losses to be recognized and booked at the time of loan origination, is significant and will have dramatic operational impacts on the balance sheet and capital reserve requirements. This change in generally accepted accounting principles (GAAP) will result in new historical data requirements and forecasting models for financial institutions relative to the estimation of the ALLL. The Federal Reserve Board, Federal Deposit Insurance Corporation, National Credit Union Administration and Office of the Comptroller of the Currency issued an initial joint statement on the new standard on June 17, 2016. Additional guidance from the federal agencies is anticipated.
FASB’s adoption of the CECL model into generally accepted accounting principles (GAAP) requires financial institutions to compile and analyze enough historical data to support reliable predictions about future loan performance. Financial institutions must begin to assess data sources and the sufficiency thereof, and how that data can be applied to a forecasting methodology that will provide meaningful results.
Forecasting methodologies could be complex. Financial institutions must understand the point at which the cost of gathering this intelligence outweighs the benefit of a more accurate ALLL reserve. Guidance from regulators will be crucial to this determination and will hopefully address the issue of scalability.
How Will This Impact Your Business?
Once the new standard is implemented, there will most certainly be audit implications, including new supporting documentation and procedures that could very well increase the costs of audits overall. Even more importantly, is consideration of the ultimate impact on the financial institution’s bottom line. There is the potential that CECL will result in a significant increase in capital reserves. Add to that, the confusion of trying to explain the new methodology. The snowball effect of CECL could flatten an unwary financial institution at the bottom of the hill.
Top 5 CECL Considerations
- Historical data – where is it coming from and how is it getting there?
- Forecasting methodology – how are reliable forecasts made using historical data and current conditions?
- Scalability – how transferable is a complex process/methodology used in arriving at a reliable ALLL calculation?
- Audit implications – how are the ALLL methods and calculations supported and explained to auditors and examiners?
- Impact on the Bottom line – what is the impact on capital reserves and if it is significant, what’s next?
Don’t Know Much About History? You’ll Need To!
Although mandatory implementation of CECL may seem like it won’t come for some time, the issue of capturing relevant historical data must be addressed now. Operational readiness is the key to a financial institution’s success in implementing the future CECL model and demonstrating confidence in ALLL reporting to regulators.
Start now to educate, communicate and implement the new standards using the CreditQuest Portfolio Manager ALLL tool. This tool allows financial institutions to avoid unnecessary costs and have a better understanding of their commercial loan portfolio risks, thereby exposing opportunities for greater profitability.
CreditQuest Portfolio Manager gives managers timely access to detailed commercial loan portfolio information to monitor performance, quickly identify problems and take prompt action.
Would you like to learn more about how to prepare for the changes ahead? D+H has developed a webinar, ALLL and FASB’s CECL Model: Perspectives to Consider for Your Financial Institution.