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Here's Your Update on the CECL – Current Expected Credit Losses
Thursday, September 15, 2016 6:35 AM

Cheryl Ehmann, AVP Staff Analyst, Credit Union Resources

By now, everyone should have heard that changes are coming to how we determine the balance of the Allowance for Loan Losses account.  We have a little more information than when this topic first appeared, so let’s lay out what we know now.

The most important bit of information: when exactly will this new way of determining loan losses be required? For credit unions, this will be required starting in 2021. That does give us five years, but don’t think you can put this on the back burner for that long. You do need to start determining what kind of data your system can collect and what kind of data you want it to collect. CECL (Current Expected Credit Losses) should be considered if you are renegotiating terms with your electronic data service provider or looking for a new provider.

Historical losses will no longer be enough to determine the Allowance account balance. Although no specific method of calculation is required, you will need some way to determine future anticipated cash flows. However, if there is a legitimate reason you cannot forecast past a certain time period (not that you don’t know how or don’t have the system capabilities), you may revert to historical losses for those years that are not forecastable.

Some possible methods that might be useful to determine future losses would include discounted cash flow calculations and data migration. Begin determining now if you have a system that would be able to make these calculations. Prepayments should be included in loss calculations. A weighted average life should not be used for loan pools; you must use the actual loan lives. Third-party vendors are not required to perform this analysis but may be necessary based on your resource limitations. Begin researching possibilities.

One good bit of news: you will not need to calculate losses on off-balance sheet items that are unconditionally cancelable by the issuer. This would include credit cards. You no longer have to take into account unused lines of credit in the calculation.

On June 17, 2016, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency issued a joint statement on the new accounting standard on financial instruments and credit losses. 

When the switch to the new accounting method is made, there will be a one-time posting to Undivided Earnings. This will help to minimize the income statement impact of the change. However, the more long-term loans you have in your portfolio, the bigger the difference will be between the old calculations and the new. 

At this point in time, you should be:  creating a committee to determine how this issue will be addressed, developing a project plan for implementation, reviewing the final language of the standard, ensuring your board of directors is fully informed on the topic, and examining data collection capabilities. 

About Credit Union Resources
At Credit Union Resources, our goal is to be the leading provider of business solutions to the credit union community. To accomplish this, we offer a wide variety of products and services, designed to help your credit union gain greater efficiency and effectiveness in better serving your members.

Whether you are looking for an effective advertising campaign, sales materials, new lending products, technology solutions, auditing services, a hands-on compliance partner, strategic planning assistance, a shared branching presence, or staffing and operational support; we have what you need, at a price you can afford. Simply put, we have the resources your credit union can count on. Learn more at curesources.coop.

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