A collection of papers to help drive the adoption of the CECL standard
In June of 2016, the Financial Accounting Standards Board (FASB) issued the new accounting standard ASU 2016-13-Financial Instruments-Credit Losses (Topic 326); commonly known as CECL (for Current Expected Credit Losses). The standard was a long time in the making, having originally been considered as the financial crisis wound down nearly 7 years prior. From the very onset of the discussion about a new way to measure expected credit losses for accounting purposes, the industry prepared for the impact to be considerable.
The impact was not only a change in the actual amount of reserves on the Balance Sheet; but, also the process required to be able to quantify the estimate. There are concepts introduced within the accounting standard such as forecast and reversion periods, as well as completeness requirements not typically considered as part of an allowance estimate.
Given the level of change and the challenges the industry was facing in getting the new standard adopted, a wealth of information, education and opinions were provided in the marketplace. While much of this information was useful and timely, it also is overwhelming to look back upon as we near the final effective date. Therefore, Moody’s Analytics is providing this index of our contect for reference; such that readers can quickly identify the correct piece of insight for their particular need as it relates to CECL adoption.
The following table provides an index of papers that relate to the CECL accounting guidance. This collection of papers provide readers with instruction for working with the requirements of the accounting standard as well as useful information about how the industry is putting the accounting guidance into practice.
We provide empirical support for the conclusion that the CECL standard will be less procyclical than the incurred loss standard. CECL will achieve its goal of encouraging lenders to reserve for eventual losses earlier in the lifecycle of their loans than they do today.
One of the most significant changes that CECL brought about to the accounting department is the use of economic forecasts within an accounting estimate. The following table provides an index of papers specific to the use of economic factors, forecasts or scenarios within the CECL process and the resulting allowance estimate.
CECL was a foundational change in the accounting space and it brought with it many changes within the accounting process across institutions. In addition to changes in just the accounting however, the adoption of CECL also yielded different results by asset class and/or asset structure. As a result, many institutions found themselves looking at the effect of the standard on their portfolio and strategy. The following table provides an index of papers that relate to individual asset types as well as portfolio construction.
Understanding the consequences of large drawdowns in times of need
Laurent Birade, James Partridge, Alex Cannon
The requirements of CECL have many facets, including the use of forecasted considerations, that had not been used in prior allowance estimates. These new requirements have driven challenges for institutions in justifying their allowance balances without the use of benchmarking. The following table provides an index of papers that relate to benchmarking a CECL estimate; including best practices as well as actual periodic industry results.
Introducing the Historical Loss Analyzer (HLA), a toolkit within Moody’s Analytics ImpairmentStudio™, and how to leverage public or internal data of a bank or its peer group to help address CECL requirements.