CECL

CECL has different effective dates based on the type of reporting entity. Public business entities that file financial statements with the Security and Exchange Commission will have to comply by 2020, and smaller publicly traded banks (defined by the SEC as smaller reporting companies), as well as privately held banks and credit unions, must adopt the new standard by 2023.

CECL replaces the current allowance for loan and lease losses (ALLL) accounting standard. Under CECL, entities are required to account for expected losses over the estimated life of the loan, while the existing model relies on incurred losses.

The FASB has high hopes for CECL, stating that the new standard will improve “financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations."

Complying with CECL may require you to gather, store and calculate more data than before. To satisfy CECL requirements, financial institutions will need to focus on end-to-end management, determine estimation approaches that will produce reasonable and supportable forecasts and automate their technology and platforms. Additionally, well-documented CECL estimations will require integrated workflows and incremental governance.

You won’t be able to reach full compliance without complete, clean, accurate data encompassed in a model that fits both CECL and your specifications. Investing in quality data establishes a foundation for your modeling you can trust.  

It’s expected that many financial institutions will use third-party vendors to help them implement CECL. Third-party solutions can help institutions prepare for the organization and operation implications by developing an effective data strategy plan and quantifying the impact of various forecasted conditions. The right third-party partner will deliver an integrated framework that empowers clients to optimize their data, enhance their modeling expertise and ensure policies and procedures supporting model governance are regulatory compliant.

CECL will have a significant effect on financial institutions’ accounting, modeling and forecasting. It also heavily impacts their allowance for credit losses and financial statements. Financial institutions must educate their investors and shareholders about how CECL-driven disclosure and reporting changes could potentially alter their bottom line. CECL’s requirements entail data that most credit unions and smaller lenders haven’t been actively storing and saving, leaving them with historical data that may not have been recorded or will be inaccessible when it’s needed for a CECL calculation.