Compliance: CECL FAQ document, training sessions planned

July 22, 2019

The Financial Accounting Standards Board, which issued the current expected credit loss (CECL) standard, has issued a second CECL question-and-answer document about the standard. FASB staff also announced that it is planning a series of training sessions around the country to discuss issues addressed in the document to help smaller institutions with CECL implementation, with more information to follow.

CECL is a new accounting standard that changes the accounting for credit losses. It is a forward-looking standard that recognizes lifetime expected credit losses, as opposed to the current “incurred-loss” approach.

The document provides a background of the standard and answers questions on the following topics:

  • General questions:
    • Does the application of the word forecast in paragraph 326-20-30-7 infer computer-based modeling analysis is required?
    • If an entity’s actual credit losses differ from its estimate of expected credit losses, is it required to modify its forecasting methodology?
  • Historical loss information:
    • Can an entity’s process for determining expected credit losses consider only historical information?
    • How should an entity determine which historical loss information to use when estimating expected credit losses?
  • Reasonable and supportable:
    • Is an entity required to consider all sources of available information when estimating expected credit losses?
    • What if external data are not costly, but internal data are more relevant to an entity’s loss calculation? Is the entity required to obtain and/or use the external data?
    • Should an entity use external data to develop estimates of credit losses if internal information is available?
    • May the length of reasonable and supportable forecast periods vary between different portfolios, products, pools, and inputs?
    • Does an entity need to include the full contractual period (adjusted for prepayments) in its estimate of the reasonable and supportable forecast period?
    • Should an entity reevaluate its reasonable and supportable forecast period each reporting period?
    • Is an entity required to correlate reasonable and supportable forecasts to macroeconomic data, such as nationwide or statewide data?
    • When developing a reasonable and supportable forecast to estimate expected credit losses, is probability weighting of multiple economic scenarios required?
    • Is there a standard threshold that can be used to adjust historical loss information?
  • Reversion to historical loss information:
    • What should an entity do if it cannot forecast estimated credit losses over the entire contractual term (adjusted for prepayments)?
    • Can an entity adjust the historical loss information used in the reversion period for existing economic conditions or expectations of future economic conditions when developing estimates of expected credit losses?
    • Is an entity required to revert to historical loss information on a straight-line basis?

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