AAfter years of anticipation and preparation, the Financial Accounting Standards Board’s (FASB’s) credit loss accounting standard, CECL, is now effective for all financial institutions. Larger institutions that file reports with the Securities and Exchange Commission (SEC) adopted the standard for fiscal years and interim periods beginning after Dec. 15, 2019. All other financial institutions adopted the standard for fiscal years beginning after Dec. 15, 2022. Although adoption is technically behind us, institutions can’t stop thinking about CECL now. Working through the adoption of the standard with our clients, we’ve identified several common issues that will require many institutions to enhance and refine their models, supporting documentation, and controls to better align with the standard and support the largest estimate on their balance sheet. The requirement to support critical modeling decisions doesn’t go away after adoption. FASB’s postimplementation review of the standard has also resulted in some additional guidance that institutions are required to comply with. CECL: Lessons From the Field Overreliance on Third-Party Vendors To assist with implementation and the ongoing calculation of the allowance for credit losses (ACL), many financial institutions are using third-party services and purchased applications. Although the methodology employed by most of these third-party models aligns with the standard and provides management with the necessary tools to mechanically perform otherwise complex calculations, the reliance on a third party doesn’t alleviate management’s responsibilities. Management is still required to maintain documentation that supports all significant modeling decisions, from the selection of an appropriate methodology to the ongoing support for all significant assumptions. It’s not sufficient to accept vendor model recommendations without assessing and documenting appropriateness for your specific institution. Inconsistent Qualitative Factor Framework For many institutions, a large majority of the calculated reserve still comprises qualitative factors. Qualitative factors are intended to adjust the quantitative portion of the calculation to reflect the extent to which management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated (the lookback period). Institutions are still assessing qualitative factors under the logic commonly used with the incurred loss model by analyzing quarter-over-quarter portfolios and macroeconomic trends; however, this analysis should be identifying differences in the portfolio and economy when compared to the lookback period. Many institutions have also opted to use peer data to drive the quantitative portion of their calculation. When peer data is the basis for the calculation, qualitative factors should acknowledge differences between the institution’s portfolio and the portfolios of the peer group. Qualitative factors should also be supportable on a stand-alone basis. By assessing qualitative factors using this “directional consistency” concept quarter over quarter, it’s increasingly likely that the baseline hasn’t been supported to substantiate the total impact to the calculated reserve. Inadequate Internal Controls While review controls over your ACL calculation are likely similar to the controls that were in place under the incurred loss methodology, many CECL models are more complex and have additional considerations. When developing your controls over the detailed review of the calculation for mechanical accuracy, it’s important not only to consider manual inputs to the calculation each quarter but also to consider the consistent application CECL: It Doesn’t End with Adoption By Elliott Holmes, Assurance Senior Manager, Plante Moran Colorado Banker 14
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