Now that banks are completing their third call report for the 2023 calendar year, we want to share some valuable insights and lessons learned as adoption of ASU 2016-13 (Current & Expected Credit Losses/CECL), is well underway.
We have had the privilege of addressing numerous questions from clients now that CECL has been reported on the call report, potentially been through a regulatory exam, and has seen widespread implementation.
We compiled these key insights into a short checklist to assist in the adoption of ASC 326:
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Don’t forget to update your policy.
- As bankers begin digging into the specifics of CECL, it can be easy to forget to update the Allowance for Credit Losses (ACL), formerly ALLL, policy.
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- Make sure you are documenting any assumptions made, including support for the forecast and historical look-back periods used.
- Exclude any individually evaluated loans from those that are pooled.
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- Once a loan has been classified as such that individual evaluation for an allowance is considered, GAAP requires that loan be removed from pooled loans.
- Rename the general ledger (GL) accounts.
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- Change the name in the GL to Allowance for Credit Losses/ACL, etc.
- Evaluate unfunded commitments.
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- If there is a reserve needed for unfunded commitments, be sure to set up a separate liability GL account.
- Double check any information utilized by a third-party ACL software.
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- If the bank engaged a third-party to provide a software for ACL analysis, be sure to periodically do a double check.
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- This includes any information automatically uploaded from the core system.
- This includes any peer information uploaded.
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- If the bank engaged a third-party to provide a software for ACL analysis, be sure to periodically do a double check.
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- This is crucial to ensure the software is analyzing what it should be.
Additional Insights to Keep in Mind
The CECL accounting standard leaves a lot to interpretation and assumption, including:
- A reasonable and supportable forecast period.
- A reasonable and supportable historical look-back period.
- A specific methodology to adopt.
- Various policy elections to be made at adoption.
There will be new, expanded disclosures for banks with GAAP-compliant financial statements.
- This also includes expanded troubled debt restructuring (TDR) disclosures as well.
If you have specific questions about CECL, please reach out to your Pinion adviser.
