Latest CECL FAQs
CECL implementation timelines have been altered since the release of this post. Find updated information here.
The Financial Accounting Standards Board’s new current expected credit loss (CECL) standard is known as one of the biggest changes to bank accounting. Because of the complexities and changes that CECL brings, there are many questions surrounding implementation, potential effects, and more. The Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Board of Governors of the Federal Reserve System (FRB), and the Office of the Comptroller of the Currency (OCC) have put out a joint statement addressing many frequently asked questions about the new standard. The following are the latest answers the agencies have provided.
When does the CECL standard take place?
There are three different CECL effective dates, depending on an institution’s characteristics:
- PBE that is an SEC filer: December 15, 2019. For SEC filers that have a calendar year fiscal year, the standard is effective January 1, 2020, and it must apply the new standard in its financial statements and regulatory reports for the first quarter ended March 31, 2020.
- PBE that is NOT an SEC filer: December 15, 2020: Similarly, for institutions that have a calendar year fiscal year, the standard is effective January 1, 2021, and the new standard should be applied in financial statements and regulatory reports for the quarter ended March 31, 2021.
- Non-PBE: December 15, 2021. For non-PBEs with a calendar year fiscal year, the standard is effective January 1, 2022 and the standard should be applied in financial statements and regulatory reports for the quarter ended March 31, 2022.
How will CECL impact GAAP and regulatory capital?
Financial institutions can expect that allowance levels will likely increase after initial adoption and lower the retained earnings component of equity, the joint report states. The actual effects of CECL, however, will vary by institution.
A final rule modifying regulatory capital rules was approved in December 2018. The rule provides institutions the option to phase in any day-one regulatory capital effects of CECL and revises the agencies’ other rules that reference credit loss allowances to reflect the new standard. Institutions that choose to adopt CECL early may adopt the final rule before the effective date of the final rule.
How and when should CECL be incorporated into a non-PBE institution’s Call Report if the institution does not elect early adoption and has a calendar fiscal year?
CECL is effective for fiscal years beginning after December 15, 2021 for non-PBEs. This means that the institution must first apply CECL in its financial statements and regulatory reports, like the Call Report, for the period ending March 31, 2022.
To record the impact of the initial application of CECL when preparing for its first quarter 2022 Call Report:
- Estimate allowances for credit losses on loans HFI, HTM debt securities, and other on-balance-sheet financial assets and liabilities for credit losses on off-balance-sheet credit exposures by applying the new credit losses standard to these assets and exposures as of January 1, 2022
- Calculate the difference between allowances and liabilities for credit losses measured in accordance with CECL as of January 1, 2022. Calculate the allowances and liabilities for these exposures reported on the Call Report balance sheet as of December 31, 2021. The sum of these differences (net of applicable income taxes) is the “cumulative-effect adjustment” as of the effective date of the new credit losses standard.
Assume this institution:
- Recorded allowances for loan and lease losses of $150,000 as of December 31, 2021, measured in accordance with current GAAP (i.e., the incurred loss method)
- Recorded charge-offs, net of recoveries, on loans HFI of $20,000 from January 1, 2022-March 31, 2022
- Estimated alliance for credit losses on loans HFI under CECL to be $200,000 as of January 1, 2022 and $235,000 as of March 31, 2022
Should an institution make adjustments to the collateral’s fair value for expected future changes in the collateral’s fair value when using fair value of collateral practical expedient for determining allowance for credit losses?
No. An institution should use the collateral’s fair value as of the reporting date, adjusted for estimated costs to sell when applying the practical expedient to determine the allowance for credit losses on a collateral-dependent financial asset. The standard does not allow adjustments for expected future changes in the collateral’s fair value.
Should an institution subject to stress testing requirements under the Dodd-Frank Act (DFAST) or the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) align its reasonable and supportable forecast period for U.S. GAAP financial and regulatory reporting with the nine-quarter planning horizon used in the stress testing process?
An institution should not automatically default to nine quarters as its reasonable and supportable forecast period just because a nine-quarter horizon is used in the stress testing process. Although CECL does not suggest a specific method for estimating reasonable and supportable forecast periods, it makes clear that allowance estimates must be based upon management’s expectations. Every institution should support and document independent of the stress testing process.
Does the baseline macroeconomic scenario published by the Federal Reserve for stress testing purposes signify the Federal Reserve’s or the agencies’ view of the forecast of future economic conditions and thus represent an appropriate reasonable and supportable forecast to use for CECL?
No. Forecasts used for estimating expected credit losses under CECL should incorporate economic variables and other factors relevant to the collectability of an institution’s portfolios based on management’s expectations.
Can an institution leverage its stress testing model(s) for CECL implementation purposes?
If an institution plans to use its stress testing model(s) as a building block in the development of its models for CECL implementation purposes, it should ensure that any modeling differences are factored into the allowance estimation. Additional segmentation factors for revolvers’ credit card loans may include, but are not limited to:
- The borrower’s average historical payment rate or pattern;
- The borrower’s utilization rate in relation to the account limit;
- The borrower’s delinquency status;
- The borrower’s delinquency history;
- The borrower’s credit bureau score;
- The directional trend of the borrower’s credit bureau score; and
- Whether the borrower is subject to a repayment program.
Are there internal control considerations that management should address when gathering, maintaining, and using data needed to implement CECL?
Each financial institution should have internal controls set based on the size of their institution, as well as the nature, scope, and risk of its activities that provide for, among other things, timely and accurate financial, operational, and regulatory reports. This is especially important in regards to data that may not have been used prior to CECL.
How do the agencies define “smaller and less complex?”
There is no specific definition for “smaller and less complex.” Rather, the agencies use the phrase to demonstrate that CECL is scalable to all institutions. Institutions use allowance methods that are scaled to their size and complexity, ranging from simple spreadsheets supporting loss rate methods to complex econometric models. The agencies expect a similar array of credit loss estimation methods will be used when CECL is implemented. Sound policies should be appropriately tailored to the size and complexity of the institution and its loan portfolio.
Are there concepts, processes, or practices detailed in existing supervisory guidance on the ALLL that will continue to remain relevant under CECL?
Yes, many concepts, processes, and practices detailed in existing supervisory guidance on the ALLL will continue to remain relevant under CECL. This includes:
- Information related to management’s responsibility for the allowance estimation process
- The board of directors’ responsibility for overseeing management’s process
- The need for institutions to appropriately support and document their allowance estimates.
- The responsibility for developing, maintaining, and documenting a comprehensive, systematic, and consistently applied process for determining the amounts of the ACL and the provision for credit losses
- Controls in place to determine the ACL and the provision in accordance with U.S. GAAP, regulatory reporting instructions, the institution’s stated policies and procedures, management’s best judgment, and safe-and-sound banking practices
- Well-documented allowances with clear explanations of the supporting analyses and rationale
- The expectation to adopt and adhere to written policies and procedures and to maintain written supporting documentation, appropriately tailored to the size and complexity of the institution and the nature, scope, and risk of its lending activities
For the full list of FAQs, click here.