CECL Resources

Introduction

The Financial Accounting Standards Board announced in 2016 a new accounting standard introducing the current expected losses, or CECL, methodology for estimating allowances for credit losses. Although Chairman Hood has called for an exemption to CECL for credit unions, CECL becomes effective for federally insured credit unions on Jan. 1, 2023. Required regulatory reporting will begin with the March 31, 2023 Call Report. Institutions may adopt the standard sooner.

See FASB’s Accounting Standards Update 2016-13, Topic 326, Financial Instruments—Credit Losses.

The CECL methodology will apply to all credit unions, banks, saving associations, and financial institution holding companies that file regulatory reports that conform to Generally Accepted Accounting Principles, regardless of the size of the financial institution.

NCUA’s Hood Calls for CECL Exemption

In a letter, NCUA Chairman Rodney E. Hood urged the Financial Accounting Standards Board to exempt credit unions from complying with the current expected credit losses methodology, or CECL. This call for an exemption follows similar concerns express by other regulators with implementing CECL. More

Understanding CECL

CECL will cover:

  • All financial instruments carried at amortized cost, including:
    • Loans held for investment
    • Net investment in leases
    • Held-to-maturity (HTM) debt securities
    • Trade and reinsurance receivables
    • Receivables that relate to repurchase agreements and securities lending agreements
  • Off-balance-sheet credit exposures not accounted for as insurance, including:
    • Loan commitments
    • Standby letters of credit
    • Financial guarantees

CECL will not cover:

  • Trading assets
  • Loans held for sale
  • Financial assets for which the fair value option has been elected
  • Loans and receivables between entities under common control

CECL also makes targeted improvements to the accounting for credit losses on available-for-sale debt securities, including lending arrangements that meet the definition of debt securities under GAAP. Under the new standard, credit losses associated with an AFS debt security are recognized through an allowance for credit losses, rather than a direct write-down as is required by current GAAP.

While CECL is a new accounting standard, the following elements of calculating expected losses will remain the same:

  • Management’s responsibility to choose the most appropriate estimation method for the credit union
  • Scalability to a credit union’s asset size and complexity of its financial assets
  • Requirement to recognize credit losses
  • Management’s process for evaluating credit risk
  • Inclusion of historical loss averages
  • Incorporation of qualitative factors
  • Determination of policies for nonaccrual of interest and charge-off

Preparing for CECL

Credit unions should begin preparing now to implement the standard. Boards of directors and senior management should familiarize themselves with CECL to assess how it differs from the credit union’s existing incurred loss model. Once familiar with the standard, they should evaluate different allowance estimation methods to determine which is appropriate, and plan for the potential impact on regulatory net worth.

CECL doesn’t require a specific estimate method. Credit unions may choose an expected credit loss estimation method that builds on its existing credit risk management systems and processes, as well as existing methods for estimating credit losses. Some acceptable methods include weighted average remaining maturity, loss rate, roll rate, vintage analysis, and discounted cash flow.

Credit unions will, however, have to change some inputs to achieve an estimate of lifetime credit losses. For example, the input to a loss rate method would need to represent remaining lifetime losses rather than the annual loss rates commonly used under the current incurred loss methodology. In addition, credit unions should consider how to adjust historical loss experience not only for current conditions, but also for reasonable and supportable forecasts that affect the expected collectability of financial assets.

Credit unions can also apply different estimate methods to different groups of financial assets. Regardless of which estimation method a credit union selects, it must document and support its credit loss estimates.

Until CECL becomes effective, credit unions must follow current GAAP guidance on impairment and the allowance for loan and lease losses.

Applying CECL

On the effective date, credit unions will apply CECL to the following financial assets:

Asset CECL application notes
Financial assets carried at amortized cost (for example, loans held for investment and HTM debt securities) that are not Purchase Credit Deteriorated assets A cumulative-effect adjustment for the changes in the allowances for credit losses will be recognized in retained earnings on the statement of financial position (balance sheet) as of the beginning of the first reporting period in which the new standard is adopted.
Purchased credit-deteriorated assets Financial assets classified as Purchase Credit Impaired assets prior to the effective date of the new standard will be classified as PCD assets as of the effective date. For all assets designated as PCD assets as of the effective date, an institution must gross up the balance sheet amount of the financial asset by the amount of its allowance for expected credit losses as of the effective date. Subsequent changes in the allowances for credit losses on PCD assets will be recognized by charges or credits to earnings. The institution will continue to accrete the noncredit discount or premium to interest income based on the effective interest rate on the PCD assets determined after the gross-up for the CECL allowance at adoption.
AFS and HTM debt securities A debt security on which other-than-temporary impairment had been recognized prior to the effective date of the new standard will transition to the new guidance prospectively (i.e., with no change in the amortized cost basis of the security). The effective interest rate on such a debt security before the adoption date will be retained and locked in. Amounts previously recognized in accumulated other comprehensive income related to cash flow improvements will continue to be accreted to interest income over the remaining life of the debt security on a level-yield basis. Recoveries of amounts previously written off relating to improvements in cash flows after the date of adoption will be recognized in income in the period received.

Resources

There are a variety of information resources available for credit unions seeking assistance understanding and implementing CECL. The NCUA will continue to work with the other federal banking agencies to develop uniform guidance and supervisory expectations and will update this page as materials are made available.

FASB Resources

 NCUA Guidance

Interagency Guidance

Conference State Bank Supervisors Resources

  • CECL Readiness Tool This tool provides useful tips on planning for CECL is not intended to establish regulatory expectations or deadlines; rather this tool provides helpful tips on planning for CECL implementation and how to get started.

AICPA Resources

Webinars

  • “Ask the Regulators: CECL Webinar” April 11, 2019. Registration is required to view this webinar, which covers the significant differences financial institutions should expect in their accounting procedures following CECL changes, with a focus on how CECL changes will affect smaller institutions. It includes a detailed discussion of the weighted average remaining maturity method for estimating the allowance for credit losses. The webinar was hosted by the Federal Reserve Bank of St. Louis with presenters from the NCUA, FASB, the Federal Reserve, the FDIC, the OCC, the SEC, and the Conference of State Bank Supervisors.

If you have questions not yet addressed through this website resource page you may contact the NCUA at eimail@ncua.gov for assistance.

Last modified on
06/02/20