Ask the Experts: CECL
For those that have already adopted the new loss accounting standard, as well as those that are in the midst of adoption projects, this new accounting standard continues to raise questions. The details and the consequences of management decisions about this accounting standard continually require careful consideration. Additionally, the COVID-19 pandemic provides an example of just how much is still unknown about the long-term implications on CECL adoption.

On this site, Moody’s Analytics offers thoughts from our subject matter experts on CECL to help you tackle these developing challenges. We encourage you to submit your questions and we will be sure to respond. For frequently asked questions or ones that are most top of mind for many institutions, we will answer them directly on this site.
As the COVID-19 pandemic continues, questions continue to arise regarding the handling of reasonable and supportable forecasts. For example, can any forecast be "reasonable and supportable" amid the COVID-19 pandemic?

As we embark on this reality, which began not even one full quarter into the transition to CECL for most public filers, events unfolded that caused many to question the foundation of the decisions they made during the CECL implementation. These questions remain even for those who delayed CECL adoption as part of the CARES Act (until the end of 2020 or the cancellation of the federal emergency).


The intention of the FASB standard in defining a reasonable and supportable forecast period was to identify the length of time that a company could support while creating a forward-looking allowance estimate. In practice, this has ranged from one year to, in some cases, the entire expected life of the asset. Using a one-year reasonable and supportable period as an example, management stated that they could support only the first year of a forecast—but then they would revert to historical values. COVID-19, however, has led many in the accounting industry to question whether any forecast period is supportable. As the first quarter ended, many wondered how high unemployment would go and what the impact of the CARES Act may be. As we move forward, these questions persist as well as concerns over additional waves of outbreaks and what our "new normal" will look like and mean to certain industries.


This volatile short-term market and uncertainty about what a recovery looks like has left accountants questioning what is reasonable and supportable. To answer this the most helpful tool is reviewing the forecasts themselves. The following table shows the US unemployment expectation based on three economic scenarios produced by Moody’s Analytics. All 3 are Baseline scenarios as of 2/28/2020, 3/31/2020, and 4/30/2020.




What can be noted is that as the pandemic unfolds, the unemployment projection increases and the time to return to a long-term median elongates. However, it is also noteworthy that in all instances, the projection does return to a longer-term average.


As a result of this outlook, it actually brings into perspective what we have heard from the FASB and regulators as the first quarter was ending. While the short term may be difficult to assess, the reasonable and supportable period should also consider the recovery as well as potential stimulus packages from the government. To do this, you would need to ascertain that the reasonable and supportable period is the original one, and has not been drastically shortened due to these events. This would provide for allowance values to reflect the expected stabilization of the economy, despite volatile and dramatic effects expected in the near term.


Finally, this event has created an unprecedented economic environment in the United States; thus, we do not have a good benchmark to compare to. As a result, shortening the reasonable and supportable period and reverting to historical values (as dictated by the standard) may be less accurate than relying on economic forecasts. 

For accounting purposes, should I still be using any models that were developed pre-pandemic? Are they still viable in my CECL process? 

 

The events that have unfolded related to the COVID-19 pandemic are certainly new territory for the US banking industry—or at least new territory given our current data capabilities. Therefore, it is safe to say that any models used to measure credit risk did not account for any comparable past events. However, most models do include the Great Recession of 2008, so there is some consideration to drastic changes in the economy. 

 

Even so, many accountants are asking themselves whether it is appropriate to use such models in their CECL process both during and after the pandemic. Despite the uncertainty, most people in the industry agree that it is still reasonable to use them. What is beneficial is that these models generate a very specific output, with calculations that can be traced and understood. For accountants, this is an important starting point from which to provide these credit metrics. That said, it will be necessary for accountants to understand what is, and is not, included in those model calculations. They will require careful thought and, in many cases, management-level adjustments to factor in the effects of the current market situation. 

 

Moody’s Analytics has been helping customers with this analysis and giving advice on how to determine what specific adjustments may be necessary for your organization. If you are interested in such assistance, we encourage you to reach out to us using the links on this site. 

CECL Subject Expertise

Our CECL experts are here and ready to help you through any stage of the implementation and post-implementation process.

Jin Oh's portrait
Jin Oh

Jin is a Risk and Accounting Solutions expert and focuses on impairment, stress testing, and capital planning solutions for both corporate and financial institutions.

Laurent Birade
Laurent Birade
Laurent advises U.S. and Canadian financial institutions on risk and finance integration, CCAR/DFAST stress testing, IFRS9 and CECL credit loss reserving, and credit risk practices..
Masha Muzyka
Masha Muzyka
Masha is responsible for CECL/IFRS 9 thought leadership and ImpairmentStudio™ business architecture. She has 16 years of experience in the financial industry.
CECL Subject Experts

Robby Holditch
Robby Holditch
Robby is a Director in the Regulatory and Accounting Solutions team. He is responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the Americas.
Scott Dietz
Scott Dietz
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US.
Sohini Chowdhury
Sohini Chowdhury
Sohini is a senior economist at Moody’s Analytics, specializing in macroeconomic forecasts and scenario design, consumer credit models and market risk research, especially as they apply to risk management, stress testing and CECL/IFRS 9.