The new “current expected credit loss” (CECL) accounting standard is addressed in updated “frequently asked questions” (FAQs) issued by federal financial institution regulatory agencies, focusing on the methodology for estimating credit loss allowances and related supervisory expectations and regulatory reporting guidance.
The CECL standard – which was published by the Financial Accounting Standards Board (FASB) in June 2016 and takes effect in 2020 and 2021, depending on a financial institution’s characteristics – is aimed at estimating allowances for credit losses. It applies to all financial assets carried at amortized cost (including loans held for investment and held-to-maturity debt securities), a lessor’s net investments in leases, and certain off-balance-sheet credit exposures such as loan commitments and standby letters of credit. Additionally, although the accounting standard does not apply to available-for-sale debt securities, it modifies the existing accounting for impairment on such securities.
The updated FAQs (addressed in FDIC Financial Institutions Letter (FIL) 41-2017) address qualitative factors, data to implement CECL, purchased credit-deteriorated assets, the evaluation of the public business entity criteria, the mechanics of adopting the standard for Call Report purposes, and collateral-dependent loans.
The FAQs, according to the FDIC, emphasize that CECL is scalable to institutions of all sizes, and that “community institutions are not expected to need to adopt complex modeling techniques to implement the new accounting standard. Further, institutions are not required to engage third-party service providers to assist management in estimating credit loss allowances under CECL.”
The FAQs encourage financial institutions to plan and prepare for the transition to and implementation of the new accounting standard, particularly with respect to determining the estimation method or methods to be used and collecting and maintaining relevant data to implement each selected method.
“The agencies expect institutions to make good faith efforts to implement the new accounting standard in a sound and reasonable manner,” the FDIC stated.