Chris Emery

About Chris Emery

Chris has helped hundreds of financial institutions of varying asset sizes and employing all major core systems implement allowance technology that supports their efforts to comply with regulatory and accounting standards, including in their current transition to estimating the allowance under CECL.

The Issue of Disclosures and the Proposed ASU – Codification Improvements – Financial Instruments

This is the third installment in a series of blog posts about the proposed ASU for codification improvements to ASU 2106-13, better known as the CECL standard. Click here to see the initial post in the series and to read some background on the proposed ASU. Issue 5A: Vintage Disclosures - Line-of-Credit Arrangements Converted to Term Loans One of the new disclosures required by the CECL standard is the disclosure of the carrying value of loans disaggregated on both their credit quality indicator as well as the vintage, or year of origination. The entity would have to produce this disclosure with columns for term loans originated in the last five years, as well as separate columns for term loans originated prior to the last five years and revolving loans. See the below illustrative example directly from the guidance: An issue that was discussed at the November 1st meeting of the CECL Transition Resource Group was how loans should be treated in the vintage disclosure that had previously fallen into the revolving category but at some point since have converted to term loans. A variety of scenarios were raised, including revolving loans where an eventual conversion to term was written into the original agreement, or loans where the lender performs a new underwriting and converts the existing revolving loan to a term loan. This also might include loans that are restructured as part of a Troubled Debt Restructure (TDR) agreement. Opinions seemed to differ on what the correct treatment of these loans would be for disclosure purposes: whether they should be included in the column based on their origination date, included in the column the based on the date they converted to term loans, left in the revolving column even after the conversion to term, [...]

2019-02-23T21:32:47+00:00February 15th, 2019|Blog, CECL, CECL Accounting|

FASB CECL Roundtable Recap – from January 28

On January 28, 2019, the FASB hosted a public roundtable on CECL intended to cover one main topic as well as a secondary topic. A large group was in attendance, with representatives from banks of various sizes, regulators, representatives from audit firms, as well as bank stock analysts and other readers of financial statements. Bank Policy Institute Proposal The primary topic was a letter containing a proposal made by the Bank Policy Institute (BPI) to FASB on November 5 identifying their concerns with CECL, as well as some proposed changes to address these concerns. The BPI is a banking trade group whose membership includes over 30 of the largest and most influential banks in the country. The first part of the letter asked for a delay in the implementation timeline as well as a more comprehensive study to be done to assess the “systemic and economic risks posed by CECL.”  The BPI’s proposed change to the standard is to essentially split the impact of CECL into three categories: Non-impaired financial assets Loss expectations within the first year would be recorded to provision for loan losses in the income statement Loss expectations beyond the first year would be recorded to Accumulated Other Comprehensive Income (AOCI) Impaired financial assets would have expected losses recorded entirely in earnings The entire proposal can be read here. If this splitting of the total expected losses sounds familiar, it may be because this proposal has a lot in common with the “three bucket approach” that was proposed back when FASB and IASB were attempting to converge on expected loss standards, and in fact has some elements in common with IFRS-9, IASB’s expected loss standard that went into effect in 2018. The BPI points to both the negative capital [...]

2019-02-13T18:29:56+00:00February 1st, 2019|Blog, CECL, Regulators|

The Issue of Recoveries and the Proposed ASU – Codification Improvements – Financial Instruments

This is a second in a series of blog posts about the proposed ASU for codification improvements to ASU 2106-13, better known as the CECL standard. Click here to see the initial post in the series and to read some background on the proposed ASU. Issue 1C: Recoveries The issue of the treatment of recoveries of previously charged off amounts has been an ongoing topic of discussion. It was discussed at the June 11 TRG meeting, discussed again at a subsequent August FASB board meeting, then discussed again in the November 1 TRG meeting. Two main issues were brought up and deliberated around this: Inclusion of Recoveries in the ACL Estimate Some preparers did not feel that the standard was clear on if recoveries should be included in the estimate of expected credit losses. Many financial institutions use net charge-off rates today, that is, loss rates that include both the charge-offs as well as any subsequent recoveries, which theoretically produces an allowance that is net of those amounts today. There were also some questions about which types of recoveries should be included in the estimate, and if recoveries were required to be considered, or if that was optional. Some of these questions were based on the difficulty in obtaining data related to recoveries. Negative Allowances Related to the question above, if recoveries are included in the estimate of credit losses, then this could result in allowance amounts at either the loan or segment level that could at times be negative. Examples were given of banks who had very high levels of losses during the financial crisis where the subsequent recoveries of these amounts resulted in net recoveries in the years following the crisis. Preparers felt that clarification was necessary considering this definition [...]

2019-02-13T18:31:07+00:00January 28th, 2019|Blog, CECL, CECL Accounting, CECL Education|

Proposed ASU – Codification Improvements—Financial Instruments – What’s New on the CECL Front?

When FASB released the CECL ASU in June 2016, the defining theme through the ASU was the flexibility given to preparers with regard to the new expected losses standard. Since this time, there have been many discussions and buckets of ink spilled on the interpretation of the guidance released, but no new ASUs released that actually changed the guidance. While ASU 2018-19 was issued in late 2018, all this really did was make some clarifications and changes around the effective date of the standard for private companies, essentially extending the adoption date for those companies to Q1 2022. However, the first proposed ASU with substantial changes to the codification has now been proposed as of November 19th, 2018 with a comment period ending on January 18th, 2019. This ASU addressed many of the issues that have been brought up and discussed in the Transition Resource Group (TRG) formed by FASB to look at the implementation of the standard, as well as other issues brought up by stakeholders to FASB. We’re going to spend the next series of blog posts looking at a few of these issues and how they will affect the implementation of the standards for financial institutions. For reference, the proposed ASU can be found on FASB’s website here under the title 11/19/18: Proposed Accounting Standards Update—Codification Improvements—Financial Instruments. The issues are numbered in the update, and we will use the same number scheme to be consistent. Issue 1A: Accrued Interest One of the issues that came up at the June 11, 2018 meeting of the TRG was the issue of Accrued Interest. In CECL, the estimate of credit losses is to be based on the amortized cost basis of the asset. This is defined in the glossary of the ASU [...]

2019-02-13T18:30:31+00:00January 18th, 2019|Blog, CECL, CECL Accounting|

What is the PD/LGD Transition Matrix Model for CECL?

The transition matrix model (TMM) determines the probability of default (PD) of loans by tracking the historical movement of loans between loan states over a defined period of time – for example, from one year to the next – and establishes a probably of transition for those loan types between different loan states. […]

2018-10-24T11:14:12+00:00October 19th, 2018|CECL, Methodologies|