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Tips for Preparing for Current Expected Credit Loss
Friday, April 28, 2017 7:00 AM

Five things compliance teams need to know about the rule before it takes effect.

The new accounting rules from the Financial Accounting Standards Board (FASB) for estimating loan loss reserves on the Current Expected Credit Loss (CECL) model offer general guidelines and a list of implementation possibilities, but no specific recommendations.

This change will impact any credit union with an asset size of over $10 million, as credit unions under this threshold are not subject to GAAP.

Your Cornerstone Compliance Team recommends five things to consider as you prepare to implement CECL.

  • Evaluate and determine the right model for you. CECL does not prescribe the use of specific estimation methods. Rather, allowances for credit losses may be determined using various methods that reasonably estimate the expected collectability of financial assets and are applied consistently over time. Additionally, a credit union may apply different estimation methods to different groups of financial assets. Credit Union Executives Society CFO Focus recently ran an article showing the results of a study that tested a broad range of modeling techniques, which might be of interest when evaluating which model is best for your credit union.
  • Locate and collect the data. CECL evaluation models will take a lot of data and look at multiple years of historical performance, such as risk rating by individual loan, loan duration, individual loan balances, individual loan charge-offs and recoveries, and individual loan segments. Your loan data may be stored in various locations within your credit union. Locating and storing the data in one location will be very important under CECL.
  • Data cleansing. While it is critical to gather the data you need in one location, it is also important to ensure your data is accurate and reliable. Take steps to validate your data so it will provide you with good modeling.
  • Don't wait, but don't panic. While the rule will take effect for annual periods beginning after Dec. 15, 2020, credit union teams should not wait until the last moment to start preparing. Over the next two years, credit unions should be creating their models and testing scenarios.
  • Validate. Once you have created the models you plan to use, validate and document to provide support of your models, and reserve levels for auditors and examiners. This should be the focus of CECL implementation in 2019.

Source:  NWCUA