New Disclosures under CECL: What Banks & Credit Unions Need to Know

Mary Ellen Biery
September 22, 2021
Read Time: min

CECL disclosure requirements for 2023 filers and others

New disclosures are required under CECL in some cases. Here’s how they’re changing for financial institutions.

See below for key takeaways of this article.


Stay updated on all things CECL.

New Disclosures under CECL

New disclosures under CECL, the current expected credit loss model, might not be the top concern of financial institutions shifting to the updated accounting standard in 2023. Still, revisions to existing disclosures and developing the new disclosures required by CECL are important in complying with the switch from the incurred loss method.

Boards, shareholders, and auditors alike will want to know CECL’s impact and how the bank or credit union has determined the impact of the expected loss model. As they always have when institutions have reported under the incurred loss method, stakeholders and others will want to know how the allowance for credit losses has changed within the reporting period. In addition, CECL won’t change the desire of financial statement users and examiners to know about the credit risk within the portfolio, including how the bank or credit union measures credit quality.

Financial statement disclosures about CECL play a central role in providing all of the above information, which is required by the new standard.

That’s why it’s important to be thinking now about new  disclosures under CECL and how existing disclosures might change, according to several CECL experts.

Even though it’s best to begin work on disclosures early in the transition, in practice, CECL disclosures are often one of the last things financial institutions seem to address, despite good intentions. Banks and credit unions can be so focused on selecting CECL methodologies and developing the quantitative output for the calculation, as well as making qualitative adjustments and addressing other aspects of the accounting standard, that disclosures aren’t dealt with until late in the process, according to Gordon Dobner, Partner in BKD’s National Financial Services Group.

“And in any major standard shift like this, the disclosure piece can be significant,” Dobner said during the recent Abrigo ThinkBIG Conference.

“In any major standard shift like this, the disclosure piece can be significant.” 

CECL Disclosures
Details on what to disclose, few on how

One of the biggest challenges related to financial statement disclosures for financial institutions adopting CECL is that the new standard has “got a lot of discussion on things you should disclose, but it’s not very prescriptive in how you do it,” Dobner noted.

As mentioned above, new disclosures required under CECL include descriptions of the methodologies used to develop the allowance for credit losses and what drove those methodology decisions. Financial institutions must also discuss what caused changes in the allowance from period to period, he said. Banks and credit unions have latitude on exactly what to say in these disclosures, so it’s been a learning curve so far among those that have made the CECL transition.

Among Securities and Exchange Commission (SEC) registrants that adopted CECL already, disclosures about methodology selection and allowances changes from period to period have so far tended to be “kind of basic” and could have used more information, Dobner said. Among the areas that deserve more detail? Macroeconomic factors a financial institution considered and how changes to those affected its views, Dobner added.

For example, a financial institution might include a comment in its disclosures that says, in effect, “We might be considering unemployment” as an economic factor. “But there’s not a lot of discussion on what those factors were and how they changed, and how those impacted the reserve in totality,” he said.

Dobner and others at ThinkBIG cautioned financial institutions against trying to meet the bare minimum requirements on disclosures. Instead, they suggested focusing on “telling the story” (in their documentation and disclosures) of how they have developed their CECL estimates.

“I think it’d be wise for institutions to take that advice to heart,” said Graham Dyer, Partner in the National Professional Standards Group of Grant Thornton LLP. Auditors, directors, and shareholders will better understand the process, which benefits the institution.

Credit Quality
Some disclosures remain the same under CECL

Even though CECL eliminates discussion of loans individually identified as “impaired,” some financial statement disclosures required under CECL are similar to those financial institutions currently provide, particularly around credit quality.

For example, ASU 326-20-50-5 says, an entity shall provide quantitative and qualitative information by class of financing receivable and major security type about the credit quality of financial assets within the scope of this Subtopic (excluding off-balance-sheet credit exposures and repurchase agreements and securities lending agreements within the scope of Topic 860), including all of the following:
  1. A description of the credit quality indicator(s)
  2. The amortized cost basis, by credit quality indicator
  3. For each credit quality indicator, the date or range of dates in which the information was last updated for that credit quality indicator.

Financial institutions have had to disclose these credit quality indicators when reporting the allowance for loan and lease losses (ALLL) under the incurred-loss model.

However, public business entities (PBEs) face a change in one aspect of disclosures about credit quality indicators under CECL. They are required to present the amortized cost basis not only by credit quality indicator but also by year of origination, or vintage year, for each indicator.

“A lot of discussion gets covered on the vintage disclosures on the SEC side,” Dobner said. “There were some challenges there [for SEC registrants], but in my mind, that’s really just a modification of an existing disclosure we already had on those buckets of credit risk indicators like loan grading,”

Multiple Changes
What are the revised
or new disclosures under CECL?

Banks and credit unions must also provide additional disclosures related to collateral-dependent loans under the CECL standard, according to Dobner.

Another change is that institutions recognize credit impairment of debt securities classified as assets held for sale (AFS) through an allowance for credit losses under CECL. Existing guidance requires a direct write-down of the security to recognize credit impairment, so these changes will create additional disclosures, according to the Center for Audit Quality’s paper, “Preparing for the New Credit Losses Standard: A Tool for Audit Committees.”

Banks and credit unions making acquisitions need to be aware of additional CECL disclosures that will be different from those under the incurred loss model. Previously, institutions didn’t record an allowance for newly acquired assets. Instead, purchased credit impaired (PCI) instruments were accounted for by maintaining a separate allowance account, along with periodic cash flow estimates and periodic re-yielding/impairment analysis. Instruments not identified as PCI were considered adequately reserved due to the credit component included in the fair value adjustment. As a result, no allowance was recorded for non-PCI instruments until the estimated allowance exceeded the remaining discount and even then, the allowance generally reflected the shortfall only.

Goal: clarity around purchased assets with credit deterioration

ASU 2016-13 was intended to simplify accounting related to those financial assets that experience credit deterioration after their acquisition. Under the current CECL guidance, institutions must set aside reserves for all loans on Day 1. Financial institutions that purchased loans with credit deterioration (PCD) during the reporting period must provide a reconciliation of the difference between the purchase price of the loans and the par value, so ongoing disclosures related to PCDs aren’t required.

SEC filers have additional disclosures under CECL that are related to the transition period. The SEC outlines these in SEC Staff Accounting Bulletin 74 (now Topic 11M in the Codification of bulletins).

Documenting, disclosing decisions is important

All in all, CECL affects many aspects of disclosures related to credit losses, so documenting decisions during the process can be helpful. Some automated CECL solutions expedite the process of generating disclosure reports for the allowance. Automated CECL disclosures lighten the workload while providing transparency and documentation for requirements surrounding the CECL calculation.

Heather Cozart, Partner at DHG, told ThinkBIG attendees that among the earliest CECL adopters, financial institutions sometimes have paid “so much attention on some of the big-ticket items that on other areas, like debt securities and [Paycheck Protection Program] loans, we tended to see folks not doing a great job at really documenting or memorializing through those aspects.”

PCD Disclosures
Guidance on some disclosures might change

Requirements related to some CECL disclosures, including those related to PCDs, might change even further in the coming months. The Financial Accounting Standards Board (FASB) has indicated it is likely to make changes to CECL affecting disclosures. These changes are partly the result of CECL lessons learned since SEC registrants began presenting financial statements under the standard in 2020.

 

Changes are likely to focus on three areas:

  • PCD accounting
  • Vintage disclosures
  • Troubled debt restructurings (TDRs)

For example, FASB staff said in July auditors, financial institutions, and others have provided feedback showing that determining whether acquired financial assets qualify for PCD treatment remains too complex. The FASB made it clear that changes to PCD accounting are possible. Staff will provide additional research on several options relating to accounting for acquired financial assets later this year.

The board also agreed to begin initial discussions on whether PBEs must include gross write-off and recovery information in the vintage disclosures.

Finally, the FASB agreed to add a project to its technical agenda to consider allowing financial institutions under CECL to end recognition and measurement of TDRs. Financial institutions and others have complained that the allowance under CECL includes most, if not all, credit loss amounts previously recognized as a TDR under the incurred loss method.

Nevertheless, FASB members indicated they might have financial institutions provide additional disclosures. Those disclosures would convey relevant information about loan modifications, given the helpful information that financial institutions have disclosed during the pandemic about loan modifications and other efforts to help borrowers.

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We can help you navigate CECL. Abrigo’s ALLL and CECL Software can help you streamline the allowance calculation while bridging your incurred loss model to CECL compliance. Talk to a specialist to learn more.
About the Author

Mary Ellen Biery

Senior Writer and Content Specialist
Mary Ellen Biery is Senior Strategist & Content Manager at Abrigo, where she works with advisors and other experts to develop whitepapers, original research, and other resources that help financial institutions drive growth and manage risk. A former equities reporter for Dow Jones Newswires whose work has been published in

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Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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