What are the significant changes in disclosures under CECL?
Continuing our series of questions asked of MST Senior Advisors Paula S. King, Garry Rank, and Dorsey Baskin during the March 13, 2018 webinar “Key Issues and Trends in CECL Transition: A Panel Q & A Webinar”, the panel of allowance experts offers insights into some of the significant changes in disclosures under CECL.
What are some of the significant changes in CECL’s Allowance for Credit Loss (ACL) versus today’s Allowance for Loan and Lease Losses (ALLL) disclosures?
First, there are some newly required disclosures, such as for Public Business Entities, the amortized cost basis within each credit quality indicator by vintage, for 5 years and thereafter; a description of policies and methodologies for developing reasonable and supportable forecasts; a description of the reversion method applied for periods beyond reasonable and supportable; the initial allowance amount recognized/created on purchased loans with credit deterioration; the ACL must be shown on the balance sheet; for non-accrual loans with no related allowance, the amortized cost basis of such loans; for off-balance sheet exposures the policies and methodologies for developing reasonable and supportable forecasts.
Next, one of the most difficult issues to deal with is that the concept of “impaired loan” will no longer exist in GAAP, therefore all disclosures about impaired loans must be removed from GAAP financial statements, and MD&A. This may prove much harder than it sounds; therefore, institutions are encouraged to take an early pass through their planned disclosures with this in mind, so that they can be rewritten in a timely manner to talk about expected losses, not incurred losses.
Finally, CECL needs to be explained to investors. For example, institutions will need in their disclosures to explain that while expected future economic and loan servicing conditions are incorporated into their estimate of losses over the lives of existing assets, the credit losses on expected extensions and roll overs are not included in the ACL. It is recommended that institutions disclose that the allowance will change over time and why that will happen. For example, explain that even though the allowance is an estimate of all expected credit losses at the balance sheet date, the bank will continue to need to make loan loss provisions in future periods.
To access a recording of the webinar, click here or use the button below.
To access the CECL Modifications of Typical ALLL Disclosures whitepaper, click here.