Regulatory Agencies Issue Frequently Asked Questions Update on CECL
On September 6, 2017, the federal Bank regulatory agencies issued a joint statement in the form of Frequently Asked Questions (FAQ) to provide further guidance on the implementation of CECL (Current Expected Credit Losses), the new accounting standard on credit losses for financial instruments. While there is not much in the way of new information in the FAQ, it does provide clarification of the agencies’ position and timelines for implementation. A few of the highlights follow:
- While a liability is still required for off-balance-sheet exposure on unfunded commitments, no credit exposure should be recognized for those commitments that are unconditionally cancellable by the Bank, i.e. credit cards and certain letters of credit.
- Any expected losses on AFS securities will be recognized through an allowance for losses rather than a write-down of the specific security.
- Concessions granted on Troubled Debt Restructurings (TDR) will now be calculated under the CECL regime, whereby it will be included in the allowance estimate using the pre-modification interest rate applied to the discounted cash flow calculation.
- Institutions are not required to use a third-party vendor to measure expected credit losses and the agencies will not establish a benchmark level for the expected losses. Any cumulative effect adjustment resulting from the adoption of CECL will be recognized by a charge to retained earnings, rather than a current expense. Institutions are not allowed to build the ALLL level in anticipation of the required adoption of CECL.
- Institutions will not be required to reconstruct loss data from previous periods that are not available without unreasonable time and cost. However, the agencies recommend that Banks capture the necessary information going forward.
- For Public Business Entities (PBE) that are not filers, the CECL regime must be reported in the March 31, 2021 Call Report. Entities that are not PBEs need not report the implementation until the December 31, 2021 Call Report.