In 2016, the Financial Accounting Standards Board drafted new Current Expected Credit Losses (CECL) reporting methods to reflect the needs of the market. For many businesses, these new standards dramatically increased the amount of detail involved in credit loss reporting. The increase in detail will likely lead to a more accurate understanding of the company’s financial situation. Finance managers and local tax attorneys looking to implement these new reporting standards should understand the new details. Here are five new CECL regulations reporting requirements for businesses.
New Requirement Timeline
The new CECL regulations will not be in effect all at once. Since the Federal Reserve has laid out a timeline for their implementation, there are effectively three key dates for the new reporting requirements including fiscal year 2019, 2020, and 2021. A public business entity (PBE) that files with the Security and Exchanges Commission is required to comply with these new standards by 2019. A PBE that does not file with the SEC is required to comply by 2020. Finally, a non-PBE must begin reporting with regards to the new regulation by 2021. Finance managers should plan to update their reporting methods in line with Federal Reserve timelines.
Earlier Recognition Of Credit Losses
The Federal Reserve’s new CECL reporting requirements shift the recognition of credit losses to an earlier time frame. In the past, businesses would typically report credit losses only when the credit loss was “probable”. This would often result in losses being reported too late to matter. Now, the Federal Reserve requires credit losses to be reported without delay, as soon as the business recognizes them. The new regulations have also eliminated the “incurred” notation on balance sheets. Businesses should adapt their reporting of credit losses to comply with the new standards to establish business credit.
Classifications Of Deteriorated Assets
CECL laws have introduced a new classification to replace credit-impaired assets called purchased credit-deteriorated assets (PCD). Under the new regulations, classifications of credit related assets have changed. The main difference in criteria is that a PCD asset will result in more purchased loans. This is because the new requirements recognize PCD assets estimated separately as an allowance on the date of acquisition. The new classification of PCDs allows finance managers to more accurately report their assets.
AFS Debt Security
The status of Available-For-Sale (AFS) debt security has been changed to reflect the policy of the Federal Reserve. Under the new standard, businesses must report a credit loss on an AFS debt security via allowance for credit losses. This replaces the existing standard of a direct write-down for debt reduction plans and reports. The recognized loss is limited to the amount the amortized cost of the security exceeds the value of the security. Any incremental impairments must also be reported via a write-down. Finance managers should strive to implement new AFS debt security reporting requirements.
Estimation Of Allowance Levels
New CECL reporting requirements have different provisions for standards of estimation of allowance levels. There is no specific prescription for the allowance process, rather the used methods must only reasonably estimate the expected collectibility of assets. Additionally, these methods must be shown to be applied consistently over time. However, the methods of inputting asset data will have to be changed to comply with reasonable estimate standards. For example, the inputs to a loss rate method would need to reflect the expected losses over the contract’s length, rather than annually. Finance managers should follow the Federal Reserve’s best practice advice in order to keep their reporting accurate.
New CECL reporting requirements were created in 2016 in order to make businesses more accurately report their financial losses. These requirements started implementation for most companies in December of 2019, and for other companies in 2020 and 2021. The requirements themselves include new reporting standards for credit loss recognition. Finance managers must also comply with new reporting requirements for deteriorated assets. AFS debt securities must be written down under more consistent standards. Finally, the estimation of allowance levels has been changed to reflect reasonable estimations of assets. Finance managers should try to understand these new rules to best comply with the new CECL reporting requirements for their businesses.