More Lenders Consider Early Adoption
**Please check our most recent blog post regarding the latest changes to the FASB deadlines.**
When the Federal Accounting Standards Board (FASB) released its guidelines for the new standard for accounting for reserves, Current Expected Credit Loss (CECL), it set a timeline for implementation. Essentially, SEC filers must begin reporting according to CECL for periods after December 15, 2019; most other financial institutions, periods after December 15, 2020. While many of the guidelines left bankers scratching their heads, one provision was considered almost laughable, that which allows institutions to adopt the standard early, as early as for periods after December 15, 2018. Why in heavens name, asked most bankers and their advisors, would they want to adopt this more cumbersome, complex, costly standard earlier than necessary?
“More institutions are thinking about early adoption,” noted Regan Camp, Managing Director of Advisory Services, the Abrigo division working with lenders on their transition to CECL. In his frequent appearances before groups of bankers, Camp has been polling on early adoption, and is finding increasing numbers of them leaning in that direction.
Four Reasons Financial Institutions Are Planning Early Adoption
Reason #1: “We’re ready, so why wait?”
“The reason I hear most for adopting early is that the lender is ready,” Camp said. “The bank has been diligent in preparing for CECL, including running parallel methodologies for enough quarters to be confident that their CECL model is compliant, effective and ready to go.”
The longer prepared lenders wait, the longer they incur the inefficiencies of running parallel methods, Camp explained.
“Let’s say Credit owned the process under incurred loss, and under CECL it will belong to Finance. Why preoccupy both departments when Finance is ready to go with CECL?“
Camp added that many institutions are under pressure from their boards and top executives to complete the transition in order to resolve the anxiety that has accompanied the accounting change.
Reason #2: “We want to set the pace.”
Some institutions would prefer to take the lead implementing CECL. If deemed compliant, their interpretation of CECL is likely to accommodate their institution better than having to react to how other institutions interpret the standard.
“Some institutions have been waiting for FASB, their regulators or auditors to release more guidance on how to interpret the standard,” Camp offered. “But they’re not going to do that. They’re going to wait and see how institutions approach CECL, then tell you if what you are doing is acceptable.”
Reason #3: “CECL is an improvement over incurred loss, so why wait to implement it?”
As institutions prepare for CECL, many are coming to embrace CECL as the better standard.
”The purpose of CECL is to promote the safety and soundness of institutions,” Camp said, “to give investors and others who look at their financial statements greater confidence in those institutions. If CECL delivers a healthier reserve in a more timely manner, then why wait?”
Reason #4: “CECL can justify our current reserve.”
Many financial institutions with recent histories of few or no losses have been carrying excess reserves.
“Most institutions have a number in mind, a certain percentage of assets to be held in reserve,” Camp offered. “Following the recession, banks altered their lending practices to rid themselves of risky loans, and have little or no loss history for the years since. Many are justifying their predetermined reserve amounts with unallocated reserves and inflated qualitative factors. CECL’s forward-looking component allows them to attribute their reserve amounts to an economic forecast.“
Camp stressed that there are downsides to early adoption to consider. If you’re going to set the pace, you have to be willing to take on the risks associated with being a pioneer. Moreover, he pointed out, “Many institutions are simply not ready. It’s going to be a push for them to be ready by their mandatory adoption date.”
But for those who are ready, the perspective on early adoption is changing, the question now more “why not?” than “why would I?”
About Regan Camp
is the Managing Director of Advisory Services, leading a team of subject matter experts who assist financial institutions nationwide in accurately interpreting and applying federal accounting guidance. He has established himself as a nationally recognized speaker, writer, thought leader and trusted advisor, with a primary focus on the Allowance for Loan and Lease Losses (ALLL) and Credit Risk. Having worked closely with hundreds of financial institutions nationwide of varying sizes and complexities, Regan offers his clients a unique combination of experience and perspective, as he works closely with each institution in developing sound and defensible methodologies, policies and procedures. His lauded ability to simplify the complex has especially contributed to the appreciation and success of those with whom he has worked.