FASB has issued a second question and answer (Q&A) document that covers a number of issues related to the CECL model, including:
Reasonable & Supportable Forecasts
- Does the application of the word forecast infer computer-based modeling analysis is required?
- If an entity’s actual credit losses differ from its estimate of expected credit losses, is it required to modify its forecasting methodology?
- Is an entity required to consider all sources of available information when estimating expected credit losses?
- What if external data are not costly, but internal data are more relevant to an entity’s loss calculation? Is the entity required to obtain and/or use the external data?
- Should an entity use external data to develop estimates of credit losses if internal information is available?
- May the length of reasonable and supportable forecast periods vary between different portfolios, products, pools and inputs?
- Does an entity need to include the full contractual period (adjusted for prepayments) in its estimate of the reasonable and supportable forecast period?
- Should an entity re-evaluate its reasonable and supportable forecast period each reporting period?
- Is an entity required to correlate reasonable and supportable forecasts to macroeconomic data, such as nationwide or statewide data?
- When developing a reasonable and supportable forecast to estimate expected credit losses, is probability weighting of multiple economic scenarios required?
Historical Loss Information
- Can an entity’s process for determining expected credit losses consider only historical information?
- How should an entity determine what historical loss information to use when estimating expected credit losses?
- Is there a standard threshold that can be used to adjust historical loss information?
Reversion to Historical Loss Information
- What should an entity do if it cannot forecast estimated credit losses over the entire contractual term (adjusted for prepayments)?
- Can an entity adjust the historical loss information used in the reversion period for existing economic conditions or expectations of future economic conditions when developing estimates of expected credit losses?
- Is an entity required to revert to historical loss information on a straight-line basis?
The adoption of the CECL model will be complex and likely will require significant hours to implement correctly. BKD can help educate your team, provide implementation tools and assist with analysis and documentation. If you would like assistance complying with the CECL standard, contact your BKD trusted advisor. BKD has prepared a library of BKD Thoughtware® on this topic. Visit our website to learn more.