The Financial Accounting Standards Board (FASB) announced in 2016 a new accounting standard introducing the current expected credit loss, or CECL, methodology for estimating allowances for credit losses. CECL becomes effective for federally insured credit unions for financial reporting years beginning after December 15, 2022. Required regulatory reporting will begin with the March 31, 2023 Call Report. Institutions may adopt the standard sooner.
In June 2021, the NCUA issued a final rule, Transition to the Current Expected Credit Loss Methodology (opens new window) (12 CFR Part 702), to phase-in the CECL day-one effects on a credit union’s net worth ratio.
Credit unions with total assets less than $10 million do not have to comply with CECL (12 U.S.C. §1782(a)(6)(C)(iii)), unless expressly required by State Supervisory Authorities under state law for federally insured, state-chartered credit unions.
The Simplified CECL Tool
The NCUA developed the Simplified CECL Tool to assist small credit unions with developing their Allowance for Credit Losses (ACL) on loans and leases as required under CECL. The optional tool is designed primarily for credit unions with less than $100 million in assets.
- 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
- Any financial instrument with contractual rights to receive cash
- 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 (AFS) debt securities, including lending arrangements that meet the definition of debt securities under U.S. generally accepted accounting principles (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 changes needed to 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 does not require a specific estimation 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 incurred loss methodology. In addition, credit unions should consider ways 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 estimation 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. Credit unions should coordinate with their accountants and auditors on CECL implementation, especially if early adoption is being considered.
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 (PCD) 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.|
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 Staff Q&A, Topic 326, No. 1: Whether the Weighted-Average Remaining Maturity Method Is an Acceptable Method to Estimate Expected Credit Losses (opens new window)
- FASB Staff Q&A, Topic 326, No. 2: Developing an Estimate of Expected Credit Losses on Financial Assets (opens new window)
- Transition Resource Group for Credit Losses (opens new window) is a group who meet periodically to discuss and inform FASB about implementation issues. Click here to read discussion summaries and issues.
- The FASB staff has a Technical Inquiry Service (opens new window) to help people better understand FASB standards.
- Accounting Alerts
- Letters to Credit Unions
- 03-CU-01 – Loan Charge-off Guidance as noted below, the timing for a loan being placed on non-accrual and our charge-off guidance will not change upon adoption of CECL.
- 16-CU-13 – Frequently Asked Questions on the New Accounting Standard on Financial Instruments Credit Losses
- 17-CU-05 – Frequently Asked Questions on the New Accounting Standard on Financial Instruments Credit Losses
- Joint Statement on the New Accounting Standard on Financial Instruments – Credit Losses (opens new window)
- Frequently Asked Questions on the New Accounting Standard on Financial Instruments – Credit Losses (opens new window)
- Scaled CECL Allowance for Losses Estimator (SCALE) Method and Tool (opens new window)
- Current Expected Credit Losses (CECL) – Expected Loss Estimator (ELE) Tool (opens new window)
Conference State Bank Supervisors Resources
- CECL Readiness Tool (opens new window) This tool provides useful tips on planning for CECL. It 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 Credit Losses Task Force (opens new window)
- Credit Loss Standard (CECL) Issues (opens new window)
- AICPA Practice Aid Offers Guidance on Credit Losses for Auditors by Auditors (opens new window)
- “Ask the Regulators: CECL Webinar” (opens new window) 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 ways 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 firstname.lastname@example.org for assistance.