The term CECL has been floating around for years now. Most non-financial institutions have been ignoring it, not realizing that it may still impact them. You need to know that CECL may impact your organization and the time to implement CECL under Accounting Standards Update (ASU) 2016-13 has finally come. What exactly does that mean for your organization? What types of financial instruments fall within the scope of CECL? To begin, let us first look at what CECL is.
Under current accounting standards, credit losses on financial assets are recognized, typically through an allowance, when it is probable that a loss has been incurred. Under CECL, organizations will recognize an allowance for credit losses that are expected to be incurred in the future, resulting in earlier recognition of these credit losses.
The CECL Model Is Inclusive of a Wide Range of Financial Assets and Includes:
- Receivables from loans and notes.
- Receivables from trade and contract assets resulting from revenue transactions (accounts receivable).
- Investments falling under Debt securities.
Many have concluded that CECL will not have a significant impact on their reserving levels, which could be true; however, you still must perform the analysis. Once performed, you need to document your rationale and position with proper substantiation – such as historical loss experience.
What Needs to Happen for Non-Financial Institutions to Ensure CECL Compliance?
- Review your financial statements to identify potential financial assets that fall within the above outline.
- Document financial assets that fall under CECL.
- Determine a reasonable approach to producing an estimate based on your portfolios and your data. Some calculation considerations are:
- A variant of a historical loss rate model provides a good starting point, but you still must document how you determined your historical loss rate.
- Another approach may be to use your accounts receivable aging schedules. A close look at what data you have available and the analytic reports you use will help assess your potential exposure as these schedules can provide guidance on how to calculate your expected loss under CECL.
This standard is effective for non-public entities in fiscal years beginning after December 15, 2022. Early planning for the implementation of this new standard is key.
If you think this may apply to your organization, please reach out, and we will be able to help you with implementation.
This article was written by Jerraca Allhands, CPA in our Butte office.