The Current Expected Credit Loss (CECL) model is an accounting standard introduced by the Financial Accounting Standards Board (FASB) in the United States. It fundamentally changes the way private companies must account for expected credit losses on financial assets, such as loans and investments. This standard is designed to improve the accuracy of financial reporting by requiring companies to consider expected future losses much earlier in the lending process. Private companies, like their public counterparts, are subject to CECL’s requirements, and they must address several key questions to ensure compliance and smooth implementation:
1. What is CECL, and why does it matter?
CECL, short for Current Expected Credit Loss, is an accounting standard that requires companies to recognize expected credit losses upfront, rather than waiting for losses to materialize. It matters because it significantly impacts financial reporting, risk management, and business operations. Understanding the core principles and objectives of CECL is the first step.
2. How do I calculate expected credit losses under CECL?
CECL requires companies to use historical information, current conditions, and reasonable and supportable forecasts to estimate expected credit losses. Determining the appropriate methodology and data sources for these calculations is essential.
3. What data do I need, and where can I find it?
Accurate and relevant data is critical for CECL calculations. Private companies must assess the availability of historical data, consider macroeconomic indicators, and potentially implement data collection and storage processes.
4. What are the challenges of transitioning to CECL?
Transitioning to CECL can be complex, and it’s important to identify potential obstacles, such as changes to existing processes, systems, and workflows. Understanding these challenges is vital to planning and executing a successful transition.
5. How will CECL impact financial statements and disclosures?
CECL can have a significant impact on financial statements, including the income statement, balance sheet, and footnotes. Private companies need to understand how these changes will affect their financial reporting and disclosure requirements.
6. How can I build a CECL-compliant framework?
Establishing a CECL-compliant framework involves creating policies and procedures, documenting methodologies, and implementing an ongoing process for monitoring and adjusting expected credit losses. Developing a robust framework is crucial for compliance.
7. How can I engage with auditors and regulators on CECL?
Private companies should be prepared to engage with auditors and regulators to ensure they are following CECL guidelines correctly. This involves ongoing communication and collaboration to address any concerns or questions.
8. What are the ongoing challenges and considerations with CECL?
CECL is not a one-time implementation; it requires continuous monitoring and adjustment. Private companies need to stay informed about regulatory updates, economic changes, and industry best practices to maintain CECL compliance.
