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ABA: The FASB’s CECL Requires Sophisticated Models

May 16, 2014
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**The FASB issued the final CECL standard on June 16, 2016. For up-to-date information and resources, access the updated CECL Prep Kit.

The Financial Accounting Standards Board (FASB) is in the latter stages of finalizing the Current Expected Credit Loss (CECL) model for loans and debt securities. With the new guidelines expected to pass by year-end, bankers should be aware of the impact it will have on their institution and how to best prepare.

In a “CFO Bullets” post from the American Bankers Association, Mike Gullette discusses the CECL model’s complexities in its current form and its requirement for sophisticated models:

“Based on discussions of contractual cash flows and the time value of money, as well as assumptions using ‘neither a worst case nor a best case scenario,’ it is hard not to think that complicated models are necessary.”

“…the main culprit is the ‘life of loan’ concept – auditors will require bankers to analyze their loan portfolios not just over the next year or so, but throughout the expected lives of their loan portfolios. How will banks prove, for example, that a totally clean loan now will not be expected to have problems 4 years from now? And how will a banker perform that analysis on a pool of loans?”

Gullette goes on to state that, currently, banks do not consistently analyze the “life” of loans and that adopting this new model (as proposed) will introduce new complexities with data management.

While there is still some speculation on when FASB will issue the new standard and what the final guidance will entail, the consensus is that we will see it pass legislation in 2014 and go into effect in 2017.

To see how community banks and credit unions can begin their path to CECL compliance, download a whitepaper A Practical CECL Action Plan.

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