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Preparing for New CECL Financial Standards
As deadlines loom for new accounting and regulatory frameworks, firms must ensure they have the right management structures and IT systems in place. Here Will Newcomer (top left) Vice President of Product and Strategy, Americas, and Bart Everaert (bottom left) Market Manager, Risk & Finance, Americas, from Wolters Kluwer examine what can be done to prepare for the new standard
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n June 2016, the Financial Accounting Standards Board (FASB) made official the much-anticipated Current Expected Credit Loss (CECL) standard. While the effective date
seems far off –public business entities that are SEC filers must be compliant with CECL procedures starting in 2020, for all other institutions the standard will be enforced a year later –it will be a game changer. Financial institutions will have to determine their allowance for credit losses in a different way, affecting not only accountants, but also loan officers, internal auditors, chief credit officers and, of course, IT personnel.
The issuance of CECL concludes a journey that began in the wake of the global economic crisis. During that time, the delayed recognition of credit losses associated with loans was seen as a weakness in the application of existing accounting standards, a factor that was determined to have contributed significantly to the financial crisis. As a result, the FASB began exploring alternatives that led to the use of a more forward-looking assessment. (Similarly, the International Accounting Standards Board’s overhaul of accounting protocols for IFRS 9 takes effect even sooner in countries where U.S. GAAP principles are not the norm.)
The new accounting procedures will force bankers to keep their eyes on the road ahead, although there is a good chance of being pulled in several directions. And notably The American Bankers Association has developed a CECL-dedicated website to empower its members to come together, share, and learn the best ways to implement CECL.
Several routes into the future
With its emphasis on predicting credit losses, IFRS 9 is viewed as an improvement on the traditional incurred-loss model, i.e. IAS39, which only recognized losses after a default or other triggering event. CECL is intended to make the same upgrade to the U.S. method of accounting for credit risk, but will force organizations to account for the expected lifetime losses of every transaction, no matter the significance of its credit deterioration.
Other ways in which the standards diverge relate to the fact that the CECL standards allow for ECL computations to be solely based on historical losses if these represent a good reflection of the current state. Also, the FASB standard allows deals to have a zero expected credit loss in the event reasonable and supportable forecasts result in an expectation of full payment.
Preparing for and implementing CECL will compel banks to think about credit risk in new ways and to develop new models to account for it, with matters being especially thorny and complex for institutions that operate across borders. Such a formidable undertaking will also require effective communication among all of the business functions—risk, finance, compliance, reporting and technology.
Global financial institutions almost certainly will have to comply with several standards and reconcile the results with one another. They will have to make sure that each department is consistent in its use of the numbers produced from a given set of calculations, analyses, forecasts and reports so that they can be interpreted effectively and used by senior management to draw proper conclusions about the operating environment —and make appropriate decisions.
That effort will be all the more difficult to accomplish, given that new regulatory and accounting frameworks call for bankers to adhere to principles that are open to interpretation, and therefore to misinterpretation, rather than fixed rules. Flexibility, as it turns out, can be a double-edged sword. Success in integrating these standards into one’s organizations will depend on having proper risk management, reporting and general operating practices, and the data systems to execute them.
The long road ahead
Under CECL, credit positions are quite literally born to lose. As soon as one goes on the balance sheet, it is accompanied by an expected credit loss (ECL) that must be continually monitored and recalculated when a material change in payment prospects
www.ibsintelligence.com | © IBS Intelligence 2017
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