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Don’t Put CECL on the Back Burner

Editor’s note: This feature originally appeared in the March issue of DS News

The Financial Accounting Standards Board announced its unanimous decision to extend the Current Expected Credit Loss (CECL) accounting standard deadline, giving certain organizations more time to collect and store historically vast amounts of data required for CECL compliance.

Most entities, including non-SEC filing public organizations, non-public business entities, and smaller SEC-filing public organizations, now have until 2023 before CECL goes into effect. (The extension did not pertain to large SEC-filing organizations, which are generally defined as having market capitalizations above $250 million. Their deadline remained January 2020.)

The new accounting standard was previously scheduled to go into effect in 2020 for SEC-filing organizations, 2021 for non-SEC filing public organizations, and 2022 for non-public business entities such as community banks and credit unions.

The timeline extension certainly affords much-needed relief for smaller institutions that were scrambling to prepare for CECL. However, regulators recognize that it may also encourage some to further delay their preparation. As a result, regulators have started incorporating CECL preparedness into soundness examinations. That added scrutiny may eventually increase as the industry learns from large SEC filers' CECL results and as we move closer to the 2023 deadline.

Turn Compliance Into an Opportunity

Forward-thinking institutions recognize that, with the proper methodology, the additional data required for CECL provides much deeper insights in their institution's loan portfolio and risk profile. New intelligence can be leveraged for competitive purposes as they glean clearer understandings of asset trends, risk components, and the profitability of different segments. With more detailed views, they can, for instance, implement strategic pricing and tactically promote or pull back on specific products or product groups.

Those tempted to delay their CECL compliance strategies in light of the extension may risk falling short in future soundness examinations and compromise their ability to take full advantage of opportunities presented by CECL. However, effectively recognizing and acting on these opportunities can be easier said than done. There is no one-size-fits-all methodology for fitting vast amounts of CECL data together, and methodologies can change at any moment due to external factors. Instead, testing against a range of different scenarios is needed to determine the most appropriate method for fitting the data together to optimize long-term performance.

Testing against a range of "what ifs" that uniquely influence an enormous amount of data can make selecting the right method a time- and labor-intensive process, which may reinforce the temptation to delay CECL preparation.

Fortunately, financial institutions can greatly streamline what would otherwise be a daunting testing process by adopting CECL compliance tools enhanced with scenario-planning capabilities.

With automated scenario planning, financial institutions can compare various pool segments, calculation methodologies, and even qualitative adjustments prior to finalizing their allowance for loan and lease losses (ALLL) reserve calculations. Essentially, that means organizations can easily test multiple methods and evaluate the results before committing to a specific one. The ability to test in different environments and scenarios shows how ALLL calculations may change. Understanding those changes and implications may enable development of better strategies and contingency plans to maximize profitability.

Rather than giving into the temptation to procrastinate, financial institutions would be wise to push ahead on executing their CECL compliance strategy, using the extra time to evaluate automated scenario planning capabilities. That will help prevent a last-minute rush to meet the extended deadlines, providing organizations more time to achieve automation for streamlined CECL compliance, competitive differentiation and long-term profitability.

About Author: Rick Martin

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Rick Martin is Product Manager, Financial & Risk Management Solutions, Fiserv. Prior to joining Fiserv, he worked at SouthTrust Bank and Bank of America and holds degrees in both Accounting and Finance from the University of Georgia. Martin is a Georgia Certified Public Accountant (CPA) and has owned and operated a small public accounting firm for over six years.

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