Pub. 1 2021 Issue 3

24 | The Show-Me Banker Magazine 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's how you can prepare and comply. In 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. This is referred to as the Current Expected Credit Losses methodology (CECL) and 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 key 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 prior to 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 the recognition of credit losses on loans and resulted in loan loss allowances that were insufficient. “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. Differences between the previous and the new standards Previous New Loans/leases (could be other valuation reserves) All debt instruments carried at amortized cost (not those at fair value like AFS securities) Does not apply to HTM investments Applies to HTM investments Threshold = probable loss Threshold = expected loss Reporting period focused (“incurred”) Reporting period + forecast (“life of the asset”) Individual assets (specific reserves) + pools at historical loss Pools of assets with similar risk characteristics + historical loss adjusted for reasonable/ supportable forecast period Quantitative (data driven) and qualitative (Q-factors) Shifts focus to qualitative (adjustments based on reasonable forecasts) + quantitative How will CECL impact my institution? Adoption of the new standard will influence internal controls and information likely not