By: Kyle Curtis, Director of Lending Services
Note: The Current Expected Credit Loss (CECL) methodology replaces the Allowance for Loan and Lease Losses (ALLL) accounting standard, and all financial institutions, including small public companies, privately held banks, and credit unions, must adopt the standard for fiscal years starting after December 15, 2022 (effectively by January 1, 2023, for most institutions).
The Interagency Policy Statement issued June 1, 2020, on the Allowance for Credit Losses (ACLs) prepared by the regulatory agencies reflects the changes to U.S. generally accepted accounting principles (GAAP) as promulgated by the Financial Accounting Standards Board (FASB) in Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments issued since June 2016. These updates are codified in Accounting Standards Codification (ASC) Topic 326, Financial Instruments – Credit Losses (FASB ASC Topic 326). The June 2020 Policy Statement replaces the December 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses, and the July 2001 Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation.
The new Policy Statement reminds those institutions that they are responsible to develop, maintain, and document a comprehensive, systematic, and consistently applied process for evaluating and analyzing the institution’s Allowance for Credit Losses (ACLs). Each institution should ensure that controls are in place to determine consistently the allowance for credit losses in accordance with GAAP, the institution’s stated policies and procedures, and management’s best judgment and relevant supervisory guidance.
After analyzing ACLs, management should periodically validate the loss estimation process, and any changes to the process, to confirm that the process remains appropriate for the bank’s size, complexity, and risk profile. This validation process should include review procedures by a party with appropriate knowledge, technical expertise, and experience who is independent of the bank’s credit approval and ACL estimation processes.
If you are using a model, your vendor should provide you a validation of the model.
If you need an objective evaluation of your institution’s readiness for the upcoming Current Expected Credit Loss (CECL) implementation deadline in January, consider Young & Associates. We offer a third-party CECL Methodology Review that will confirm your institution’s policies, processes and effectiveness as required by the regulators and the Financial Accounting Standards Board (FASB).
Young & Associates’ CECL Methodology Review will:
- Objectively evaluate your institution’s allowance for credit losses methodology
- Determine that your methodology conforms to generally accepted accounting principles (GAAP) and supervisory guidance
- Identify any documentation and procedural concerns
- Identify areas which need improvement
- Provide a review of your institution’s current grading methodology to ensure proper classification of credits
- Include a detailed management report of our findings and recommendations
Customizable Policy Template Also Available
The Young & Associates customizable Current Expedited Credit Loss (CECL) policy template is designed to allow Management, with oversight from the Board of Directors, to maintain an adequate methodology for establishing, estimating, and maintaining allowances for credit losses (ACLs) to properly reflect an accurate financial position of the organization while ensuring that the institution complies with guidance outlined by the regulatory agencies and the Financial Accounting Standards Board (FASB). The policy reflects the changes required by the June 2020 Policy Statement and covers the role of the Board of Directors and Management; an overview of the allowance for credit losses; the components of the primary allowance for credit loss, including data, segmentation, contractual term, credit loss measurement, reasonable and supportable forecasts, reversion techniques, and qualitative factor adjustments; and reporting and testing.
Learn More and Connect with Us
Young & Associates’ team of experts has the regulatory expertise and industry experience to support your success. For more information on our CECL Methodology Review service, visit www.younginc.com or contact me at [email protected] or 330.422.3445.