CECL Accounting

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, [...]

2019-02-15T16:51:45+00:00February 15th, 2019|Blog, CECL, CECL Accounting|

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|

Two Things in Accounting Life Are Certain: Taxes and CECL

As we begin to look to the end of the year and think about taxes, have you thought about the impact of CECL on taxes? In this session at the National CECL Conference, Heather Wallace and Will Neeriemer of DHG discussed CECL and taxes. Here are some of the takeaways from the session. Often a tax professional is the last person to be brought into the CECL discussion, though there are tax implications relative to multiple loan accounting items. It is critical to have representation of a tax expert on your CECL committee, or at least someone to pull in when tax issues arise. Deferred tax assets and liabilities are created when there is a difference between the GAAP basis and the tax basis carrying amounts of assets and liabilities. In general, the allowance is recognized for GAAP purposes before being deducted for tax purposes. The difference in timing between the GAAP deduction and the tax deduction produces a deferred tax asset. Book method for expensing: Charge-offs and recoveries are recorded directly to the allowance. The provision is recorded to expense based on the estimated losses to be reserved. Charge-offs are recorded when amounts are deemed noncollectable. Tax method for expensing: Charge-offs are allowed when collection is no longer being pursued. The tax deduction is calculated as a direct charge-off, by the experience method, or as a fair value adjustment. It is important to track the difference from a tax standpoint or you might miss a deduction. You do get a deduction for the part of the loan you’re charging off. Use the reports from your allowance software to keep track of tax assets and liabilities. You can deduct for losses during the year for direct charge-offs. If you have a loss [...]

2018-12-14T11:18:51+00:00December 14th, 2018|Blog, CECL Accounting|

Five Things to Remember in Your Transition to CECL

Our 2018 blogs have focused on providing information relevant to your transition to CECL. In looking back over the year’s blogs to date, we revisit five things to remember in your transition to CECL. 1) There is typically no better place to start in preparing for CECL than your incurred loss methodology of today. […]

Looking into the Shadows for CECL Clarity: Shadow Loss Analysis

On April 17, Chris Emery, MST senior advisor – engineering and director of special projects, walked webinar attendees through a discussion of testing and experimenting with potential CECL methodologies and the Shadow Loss Analysis feature of the Loan Loss Analyzer allowance automation software that streamlines the process. Following are some of the highlights of Chris’s presentation. […]

It’s crunch time.

SEC filers will start estimating their allowances according to CECL as of the first quarter of 2020, just a little more than a year and a half from now. Considering they will want to run parallel incurred loss and CECL methodologies for several quarters – a year is recommended – most lenders, including private companies, are knee-deep in preparations, setting up transition committees, gathering data, studying methodologies. […]

Can you continue to use the discounted cash flow method to measure credit loss on TDRs?

Continuing our series of questions asked of MST Senior Advisors Paula S. King, Garry Rank, and Dorsey Baskin during the March 13, 2018 webinar “Key Issues and Trends in CECL Transition: A Panel Q & A Webinar”, the panel of allowance experts offers insights into some of the significant changes in disclosures under CECL. […]

2018-10-29T12:26:20+00:00March 30th, 2018|CECL, CECL Accounting, CECL Education|

What are the significant changes in disclosures under CECL?

Continuing our series of questions asked of MST Senior Advisors Paula S. King, Garry Rank, and Dorsey Baskin during the March 13, 2018 webinar “Key Issues and Trends in CECL Transition: A Panel Q & A Webinar”, the panel of allowance experts offers insights into some of the significant changes in disclosures under CECL. […]

CECL and the Board: New Standards Bring New Responsibilities

One of the MST series of articles on the impact of CECL on institution’s top managementA core responsibility of a financial institution’s board, often in conjunction with its audit committee, is oversight of financial reporting. Given recent and ongoing revisions to major financial reporting standards, the board’s workload relative to financial reporting has significantly increased. […]