Customized CECL solutions to meet your financial institution’s needs, whether using software or Excel-based modelling.

The Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) No. 2016-13, Financial Instruments — Credit Losses (Topic 326), commonly referred to as CECL, will affect a variety of assets, including:

  • loans
  • debt securities
  • trade receivables
  • net investments in leases
  • off-balance-sheet credit exposures
  • reinsurance receivables

The CECL model for financial reporting

Among other matters, the new standard requires US GAAP reporting companies, including banks and financial institutions, to report their credit losses using a different methodology, which will affect current-period earnings, increase the incurrence of losses earlier, impact capital and increase quarterly earnings volatility. CECL requires reporting companies to immediately record the full amount of expected credit losses in their loan portfolios and other fixed income/credit type assets, instead of waiting until the losses qualify as “probable.” The FASB expects this shift to the CECL model to produce more timely and relevant information. 

Effective dates

For public business entities (PBEs) that are US Securities and Exchange Commission (SEC) filers, the amendments to this update are effective for fiscal years beginning after Dec. 15, 2019, including interim periods within those fiscal years.

For all other public business entities, the amendments to this update are effective for fiscal years beginning after Dec. 15, 2021, including interim periods within those fiscal years.

An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.

Our CECL solutions to meet your needs

Baker Tilly understands each situation is different, and what your team needs to implement the new CECL standard depends on many factors. CECL doesn’t specify a specific model, so companies are responsible for selecting, implementing and justifying the models they select. CECL implementations are an enterprise-wide activity, and it is expected that senior management, risk, legal, IT, etc. will all be involved. To provide you with the best options, our solutions are able to be customized to just those you need — at the level of involvement you want.

TRAINING

Educate your internal CECL team and key stakeholders to understand the new standard

Your team will learn about the key pieces of the standard that will impact their day-to-day jobs. With the options available to your institution, you can choose to have a high level overview of the standard through a detailed workshop with examples.

GAP ANALYSIS

Understand your current situation and what you need to address

Our industry specialized professionals will analyze your processes, systems, controls, models and reports for gaps between what is currently in place and what will need to be done to comply. We advise on appropriate model selection for your business goals.

DATA STRATIFICATION

Segment your loan data to fit your institution’s loan portfolio risk

You have a lot of data. It may seem overwhelming to determine how to segment and stratify your data for your modelling. Our team will work with you to evaluate your data, segment it appropriately and review the methodology with you to ensure it fits your bank. Most companies will find that they need additional data and more granularity to implement CECL, as well as modifications to their IT and regulatory reporting systems and controls.

MODEL SELECTION AND VALIDATION

Select appropriate model and test your modelling

Once your organization has your models created, they will need to be validated. You will additionally need to test the modelling throughout the first two to three quarters its run. Our professionals can assist you in performing model validation and help you understand any issue areas and how to adjust or remediate the model.

GOVERNANCE, COMPLIANCE AND RISK RESTRUCTURING

Re-evaluate and enhance governance, compliance and risk policies

Once your organization has your models created, they will need to have updated governance, compliance and risk policies and procedures prepared and adopted to govern the CECL models’ implementation and usage. Our professionals can assist you in restructuring your governance, compliance and risk policies and procedures under the new credit loss methodology.

INTERNAL CONTROLS TESTING

Evaluate and test your internal controls over financial reporting (ICFR)

After your new processes are in place, internal controls need to be evaluated and tested for deficiencies in design, compliance with FDICIA and/or SOX requirements, and practical use effectiveness. Our professionals can assist you in evaluating governance, compliance and risk, documenting key processes and controls, and determining design and operating effectiveness.