CECL is Here! Are You Ready to Adopt? 5 Questions to Ask Yourself About Your Financial Asset Portfolio
In June 2016, the Financial Accounting Standards Board, (FASB) issued an Accounting Standards Update (ASU) with the goal of improving financial reporting by earlier recognition of credit losses on loans, investment in debt securities, and certain other financial assets. The name of the new standard is Current Expected Credit Losses or CECL, for short. CECL replaces the previous credit loss accounting model that required the recognition of losses when they were determined to be probable.
CECL requires lifetime credit loss estimates to be recognized immediately when a financial asset is originated or purchased. The new standard requires that financial assets be grouped into pool assets with similar risk characteristics when calculating the estimated credit losses. In addition, collateral-dependent assets are subject to additional guidance. January 1, 2023 marked the date of adoption for public smaller reporting companies (SRC) and private companies that did not previously early adopt.
If you are a business that holds financial assets (i.e., loans, debt securities, trade receivables, contract assets, net investments in leases, reinsurance receivables, or any other type of financial asset that might have the contractual right to receive cash), pay attention to these questions:
- Has there been a history of credit losses or is there an expectation of losses on your financial portfolio?
- Has there been a change or is there an expectation for a change in any of the credit ratings of your borrowers/customers?
- Do any of your borrowers/customers operate in an industry that is highly susceptible to economic changes or have there already been changes in the sector?
- Does variability of interest rate exposure provide your company with the risk of not collecting on outstanding principal, interest, or both?
- Is there a history or likelihood that any of your borrowers or customers ask for a change in terms to help ease certain financial burdens?
Whether the answer is “YES” or “NO” to any of these questions, CECL requires each organization to assess and document the potential that these impacts may have on its financial asset portfolio. Public business entities classified as smaller reporting companies need to adopt this standard within the first interim period after December 15, 2022. Private companies also need to adopt the standard for fiscal years beginning after December 31, 2022. If you need assistance in understanding the changes required by CECL or help with adopting the new standard, the experts at Centri can help guide you through the complexities of this emerging standard.
How Centri Can Help
- Serving as the central point of contact for the working group, ensuring that responsibilities are clearly defined, and critical deadlines are met
- Review your current credit loss policy and procedures to determine changes needed to meet the requirements of the new CECL standard
- Estimate the credit loss using historical loss experience and forecasting based on pools of similar assets as required by the standard
- Prepare a memorandum documenting the adoption impact of CECL, assumptions used, and illustrative financial statement disclosures
- Assist with maintenance of the model for subsequent accounting periods, as needed
Contact us to learn more about how our experts can help you.
About Centri Business Consulting, LLC
Centri Business Consulting provides the highest quality advisory consulting services to its clients by being reliable and responsive to their needs. Centri provides companies with the expertise they need to meet their reporting demands. Centri specializes in financial reporting, internal controls, technical accounting research, valuation, and CFO and HR advisory services for companies of various sizes and industries. From complex technical accounting transactions to monthly financial reporting, our professionals can offer any organization the specialized expertise and multilayered skillsets to ensure the project is completed timely and accurately.
For more information, please visit www.CentriConsulting.com
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