On July 17, 2019, FASB voted to propose a deferral of Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326), for smaller reporting companies (as defined by the SEC) and private and not-for-profit companies. This proposal is expected to be voted on and finalized by the end of 2019. The new implementation date for these companies is expected to be the beginning of fiscal years and interim periods beginning after December 15, 2022. The implementation date for larger, calendar-year public companies remains January 1, 2020.
This delay has several advantages for applicable financial institutions, such as additional time for information gathering, pool segmentation, model selection and completing parallel runs, as well as an opportunity to learn from both the implementation successes and failures of larger public companies still required to adopt by January 1, 2020.
Since the issuance of ASU 2016-13, numerous models have been developed to help comply with the new standard. Some of these models, such as the open and closed loss rate models and the weighted-average remaining maturity model, have some similarities with current methodology, while other models, such as the probability of default/loss given default model, are more complex and may require sophisticated programs and/or third-party servicers to implement and maintain them.
While the data requirements, assumptions, complexity and software requirements vary, a similarity among all the current expected credit loss (CECL) models is the length of historical information required and amount of time requisite to review the loan data and address any information gaps. Several CECL models require historical information for at least one weighted-average life cycle, which could easily range for a number of years. Key information not originally entered or not entered correctly into a loan accounting system, historical changes in loan accounting systems and other system limitations are just a few potential roadblocks to gathering the necessary historical information for many CECL models.
For financial institutions with a late start to the CECL implementation process, this deferral will offer some relief and an extended opportunity to gather the data required for these loan models.
For all financial institutions, regulators will play a role in the review and comments over each individual bank’s CECL implementation. The adoption of ASU 2016-03 will be a significant event and require testing of the new loan loss methodology (including pool segmentation, model selections and inputs) and preparation of financial statement and call report disclosures. Each bank should have internal controls in place over this process to help ensure the standard is properly adopted.
To avoid potential issues related to CECL adoption, communication throughout the implementation process with regulators, consultants and external accountants will be critical. Each bank should expect to communicate and ask for feedback throughout the process instead of waiting until the fiscal year of adoption.
Some example questions to consider asking throughout the implementation process are:
- Do you see issues with the number of segmented pools and composition of the proposed segmented pools?
- Do you see issues with the model selected for each segmented pool?
- Do you see gaps in the documented internal controls environment related to the loan loss methodology now calculated under ASU 2016-13?
For those institutions still concerned about implementing CECL by the newly proposed implementation dates, there’s still time to contact banking professionals in this field for assistance with the implementation process, including outsourcing of some or most of the implementation process, or simply to ask any specific clarification questions you might have.
Reach out to your BKD trusted advisor or use the Contact Us form below if you have questions.