The Financial Accounting Standards Board recently announced that it will move forward with its Current Expected Credit Loss (CECL) standard (an expected loss model), but will push theCECL_loan_loss implementation period back by one year – a huge relief for many financial institutions.

The genesis of this project was primarily due to the effects of the global economic crisis. The current incurred loss (IL) model is viewed to have failed to alert financial statement stakeholders to credit losses that were embedded within financial institutions’ financial statements. Thus, the IL impairment model gave the impression that asset valuations were higher than they should have been reported. Many believe that the current IL model was “too little, too late,” leaving financial institutions’ loan portfolios inadequately reserved for this crisis. This sentiment remains unchanged and will continue in the absence of new accounting guidance.

Controversy surrounding the challenges of implementing the new rules is what sparked the extension. Originally the rule was proposed to take effect for fiscal years beginning after December 15, 2019 for credit unions and other nonpublic businesses. With the one-year extension it will now take effect for those entities for annual periods beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Public companies will also be allotted more time with a new effective date of December 15, 2019.

Encouraging a forward-looking approach on loans and their losses, the CECL model approach still has many wondering the extent of which it will impact an institution’s loan loss reserve and credit operations as many of the detailed rules are still unknown.

Please contact Doeren Mayhew’s Financial Institutions Group for more detailed up-to-date information.