Insights: Article

Updates on Expected CECL Model

By Todd Sorenson

April 19, 2016

According to the Financial Accounting Standards Board (FASB), a final Accounting Standards Update (ASU) on the measurement of credit losses is expected to be issued in the first half of 2016. This ASU will include the Current Expected Credit Loss (CECL) model, which will replace the incurred loss model currently used in practice. This is a delay from FASB’s previous estimate of issuing the final standard in the first quarter of this year.

Concerns about CECL
CECL will require financial institutions to consider future losses on loans when estimating their loan loss reserves. Various financial institution association groups, including the American Bankers Association (ABA), the Independent Community Bankers of America (ICBA), and the National Credit Union Association have continued to voice their concerns about the proposed model.

On February 4, 2016, a group of community bankers from the ICBA, with ABA participation, met with FASB to discuss the model’s perceived impact to community banks. They asked FASB whether appropriate scalability has been included regarding community banks, and whether complex models would be required to calculate the allowance for loan and lease losses, or if Excel-based models would still be acceptable. FASB said scalability had been incorporated into the ASU and committed to meet publicly to continue to discuss the impairment standard, but made no comment on releasing another exposure draft of the ASU or allowing for a small bank exclusion, both of which had been requested by the ICBA representatives.

A January 2016 letter to FASB signed by 62 members of Congress from both parties asked several questions regarding practical alternatives to a complex model, as well as questions about a tiered implementation approach to CECL for smaller lenders. FASB responded that all financial institutions will be allowed to leverage their existing processes and not be required to perform complex modeling or hire outside consultants.

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