Current Expected Credit Losses (CECL)

Preparing for Implementation of CECL

Financial institution regulators have encouraged their institutions to:

• Become familiar with the new accounting standard and educate the board of directors and appropriate institution staff about CECL and how it differs from the incurred loss methodology;
• Determine the applicable effective date of the standard based on the PBE criteria in U.S. GAAP;
• Determine the steps and timing needed to implement the new accounting standard;
• Identify the functional areas within the institution that should participate in the implementation of the new standard;
• Discuss the new accounting standard with the board of directors, audit committee, industry peers, external auditors, and supervisory agencies to determine how to best implement the new standard in a manner appropriate for the institution’s size and the nature, scope, and risk of its lending and debt securities investment activities;
• Review existing allowance and credit risk management practices to identify processes that can be leveraged when applying the new standard;
• Determine the allowance estimation method or methods to be used;
• Identify currently available data that should be maintained and consider whether any additional data may need to be collected or maintained to implement CECL.  Examples of types of data that may be needed to implement CECL include: origination and maturity dates, origination par amount, initial and subsequent charge-off amounts and dates, and recovery amounts and dates by loan; and cumulative loss amounts for loans with similar risk characteristics;
• Identify necessary system changes to implement the new accounting standard consistent with the new standard’s requirements and the allowance estimation method or methods to be used; and
• Evaluate and plan for the potential impact of the new accounting standard on regulatory capital.