How Should My Bank Prepare for the New CECL Standard?

On April 27, 2016, the Financial Accounting Standards Board (FASB) met to discuss the costs and benefits of its planned standard for writing down bad loans and securities. During that session, the board voted to proceed with a new accounting standard that provides timelier financial reporting of expected credit losses on loans (CECL) and other financial instruments held by financial institutions and other organizations. 

They are currently working on the final Accounting Standards Update (ASU). It is expected soon – most likely by June 2016. At that time, the board also will announce whether it will stand by its decision to enact the standard in 2019 for public companies, or vote to push the effective date back.

To help you prepare for how your bank will respond to these pronouncements, the HORNE Banking team has compiled key tentative decisions and dates that FASB has determined thus far: 

1. Organizations should apply the CECL model for financial assets measured at amortized cost.
2. If an organization does not measure the allowance using a discounted future expected cash flows method, it must reflect the expected losses of the amortized cost basis, including premiums and discounts.
3. Neither the discounted cash flow technique currently used to measure credit losses of a TDR nor the cost-basis adjustment will be required for a TDR. Credit losses will be recognized, including concessions given through an allowance account.
4. The effective dates for private and private entities to be in compliance with the standard are as follows:
   1. Public entities that file with the SEC: Years beginning after December 15, 2018
   2. Public companies that do not meet the definition of an SEC filer: Years beginning after December 15, 2019.
   3. All non-public entities, including not-for-profits and employee benefit plans: Years beginning after December 15, 2019 for annual financial statements and December 15, 2020 for interim financial statements

Early application will be allowed beginning with fiscal years that start after December 15, 2018. Banks that file with the SEC will have four (4) years to implement the new CECL standards. Most community banks will have approximately five (5) years.

As noted, we expect the final standard to be released by Q2 2016. It’s important to start planning for implementation sooner rather than later to ensure a smooth transition. We’d love to know what changes you hope to see in the final standard that hasn’t yet been addressed.

Subscribe to the blog and stay in touch. Our team is monitoring these decisions closely and will continue to share information about what you should do as the standards are released.

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