Pub. 11 2021 Issue 3

22 How Community Banks Can Prepare for CECL Changes The FASB’s new credit loss model is one of the most significant accounting changes in recent history. The time to act is now – here is how you can prepare and comply. I N JUNE 2016, THE FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) issued a new expected credit loss accounting standard, which introduced an updated method for estimating allowances for credit losses. The Current Expected Credit Losses methodology (CECL) applies to all banks, savings associations, credit unions and holding companies. If your institution has not yet adopted CECL, now is the time to refresh yourself on the fundamental changes and — most importantly – to start planning. What is CECL? The impairment model introduced by the CECL standard is based on expected losses rather than incurred losses. With that, an entity recognizes its estimate of lifetime expected credit losses as an allowance. CECL also strives to reduce complexity by decreasing the amount of credit loss models available to account for debt instruments. This change was under discussion for many years before its issuance, with the impacts of the global economic crisis highlighting the shortcomings of the Allowance for Loan and Lease Losses (ALLL) framework. FASB concluded that the ALLL approach delayed recognizing credit losses on loans and resulted in insufficient loan loss allowances. “There are a lot of decisions that need to be made. By starting as early as you can, you avoid any roadblocks in getting CECL implemented by the deadline.” – Brian Lewis, RMSG Senior Risk Advisor By Risk Management Solutions Group