of significant model settings and selections. Some models may have change management reports that can be reviewed, while other models may require that the detail reviewer manually review setting selections. Review controls for overall adequacy and reasonableness of assumptions also likely require enhancement with most models. While qualitative factors were likely the only assumption that needed to be assessed under the incurred loss methodology, most CECL models rely on additional assumptions that need to be assessed periodically for appropriateness. Some common additional assumptions to consider include: • Segmentation. • Lookback period. • Forecast and reversion period. • Prepayment and curtailment speeds. • Peer group selection. • Economic variables used to apply forecast adjustments. Models that rely on specific loan-level inputs will also require management to consider the appropriate design of the controls to ensure data integrity, such as loan boarding and maintenance review controls. Accounting Standards Update (ASU) 2022-02 Troubled Loan Modifications ASU 2022-02 became effective for financial institutions starting in 2023. This ASU eliminates the guidance for troubled debt restructurings (TDRs) and introduces new disclosure requirements to provide information about certain modifications to borrowers experiencing financial difficulty. Like the guidance for TDRs, identification of modifications for disclosure under this new ASU still starts with assessing whether the borrower is experiencing financial difficulty; however, there’s no longer a need to assess whether the modification constitutes a concession. Instead, there are four specific modification types that require disclosure: • Principal forgiveness. • Interest rate reduction. • Other-than-insignificant payment delay. • Other-than-insignificant term extension. Under the new ASU, loan modifications that meet the criteria for disclosure aren’t required to be individually evaluated for purposes of your ACL calculation. These modifications are assessed the same as the rest of the loan portfolio and should only be individually evaluated if they don’t share risk characteristics with the collectively evaluated population. Institutions should define their criteria for individual evaluation in their ACL policy. If a modification is individually evaluated, there are no longer the same requirements on how to measure the specific reserve. Like other individually evaluated loans, if foreclosure is probable or repayment is expected through the operation or sale of collateral, the calculation is based on the fair value of the collateral. If a discounted cash flow method is used, projected cash flows should be discounted using the post-modification contractual interest rate to derive the effective interest rate, which is also a change from previous guidance for TDRs. Updated Disclosures The disclosures for modifications made during the reporting period that meet the identification criteria are segmented by class of financing receivable and include: • Amortized cost basis by modification type, as well as the percentage relative to the total period-end amortized cost basis of the total class. • The financial effect of the modification-by-modification type. • Receivable performance in the 12 months after modification. • The amount and amortized cost basis of financing receivables that were granted the modification in the preceding 12 months and defaulted during the reporting period. These disclosures are required regardless of whether the modification is considered a modification of an existing loan or a new loan when assessed under the guidance within ASC 310-20. The ASU also enhances vintage disclosures for public business entities by requiring disclosure of gross write-offs by year of origination. This disclosure should cover each of the previous five annual periods starting with the date of the financial statements. However, upon adoption of the ASU, you wouldn’t have to provide the previous five annual periods of gross write-offs. This disclosure requirement is to be applied on a prospective-transition basis so that preparers can build the five-annual-period disclosure over time. Conclusion Although all financial institutions have adopted CECL, efforts to refine models, supporting documentation and controls will continue for some time. As your institution works to comply, common pitfalls such as overreliance on third-party services, an inconsistent qualitative factor framework and insufficient internal controls should be addressed. Institutions should also review the 2022-02 ASU for additional post-implementation guidance from FASB to ensure compliance. In Part 4 of the Plante Moran CECL Guidebook Series, you can find examples of all required CECL disclosures, including the updates from this ASU. Plante Moran is one of the nation’s largest audit, tax, consulting and wealth management firms. Company founders called Plante Moran a “grand experiment.” And while a lot has changed in 100 years, the culture and values have not. Learn more by visiting www.plantemoran.com. 15 Colorado Banker
RkJQdWJsaXNoZXIy ODQxMjUw