Unlike the incurred loss model, the CECL model does not specify a minimum threshold for recognition of an allowance. Therefore, banks will need to evaluate expected credit losses on these assets even if there is a low risk of loss. In some cases, the resulting loss may be zero. If you would like additional information on CECL implementation please contact Kelly Shafer at kshafer@suttlecpas.com or 304-343-4126. Continued from page 21 the difference recorded directly to retained earnings as a cumulative-effect adjustment for the adoption of CECL. After this initial adjustment to retained earnings, future changes in the CECL estimate will be recorded through the income statement in the same manner as the ALLL. It is also important for banks to work with their auditor on the front end to identify information required for financial statement disclosure under the new CECL requirements. New disclosure information can be accumulated throughout the year to ensure adequate data is available when the time comes to prepare financial statements. Document All Components The CECL calculation is comprised of three components: historical loss rate, qualitative factors, and reasonable and supportable forecasts. While the historical loss rate is the base for the calculation, qualitative factors and forecasts are equally as important. FASB has identified qualitative adjustments and forecasts as significant judgments in the calculation that require proper support and documentation. They have also made it clear that there is no cookie-cutter approach to CECL, affording banks a broad latitude in how they develop and document these two components. While this flexibility allows banks to tailor the calculation to their own risks, the lack of a standard approach can make it difficult to evaluate these factors. Auditors and regulators will hone in on these specific areas. Expect questions as they work through the calculation and gain an understanding of your methodology. The key is robust documentation and the ability to back up each element of the calculation. CECL Isn’t Only About Loans For banks, the primary focus has been the impact on the loan allowance calculation but CECL also applies to a number of other financial instruments carried at amortized cost, including: • Held-to-maturity debt securities • Trade receivables • Receivables related to repurchase agreements • Finance leases • Off-balance sheet credit exposures such as loan commitments, standby letters of credit, and financial guarantees If your bank holds these assets don’t be caught unprepared. Unlike the incurred loss model, the CECL model does not specify a minimum threshold for recognition of an allowance. Therefore, banks will need to evaluate expected credit losses on these assets even if there is a low risk of loss. In some cases, the resulting loss may be zero. While the CECL model does not apply to available-for-sale debt securities, the standard made targeted changes to existing accounting for available-for-sale debt securities that are impaired. Most notably, removing the “other-thantemporary” impairment concept and requiring the use of an allowance when security is impaired as opposed to permanently writing down the cost basis. Expect expanded financial statement disclosures in this area but no significant change in accounting for available-for-sale debt securities unless specific securities are identified as impaired. wvbankers.org 22 West Virginia Banker
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