CECL for Non-Financial Institutions: Navigating New Accounting Waters

The introduction of the Current Expected Credit Loss (CECL) model by the Financial Accounting Standards Board (FASB) in 2016 marks a significant evolution in accounting standards, with vast implications for how credit losses on financial assets are estimated. Implemented in 2023 for non-public companies, CECL’s reach extends far beyond traditional banking sectors, affecting all entities with financial assets, including those with trade receivables or off-balance-sheet credit exposures. While CECL’s breadth is expansive, this article zeroes in on its essence, delineating which assets fall within its ambit, those that do not, and the new disclosure mandates it introduces.

What is CECL, and How Does It Contrast with Prior Models?

CECL is a forward-thinking credit impairment framework mandated by ASU 2016-13, fundamentally altering how credit losses are measured. Unlike the incumbent model that waits for loss indicators, CECL demands estimating expected credit losses over an asset’s life, factoring in future cash flow predictions and historical data. This paradigm shift ensures that financial statements accurately reflect the anticipated recoverable amounts on financial assets.

Entities are now tasked with evaluating credit losses on a broader spectrum, considering a mix of historical information, current conditions, and future economic forecasts. Notably, CECL does away with the “probable” loss recognition threshold, instead requiring a reserve for expected losses from when an asset is acquired or originated.

Key changes from existing guidance to the new CECL model are summarized below:


Old Guidance

New CECL Model

When to recognize credit loss

When probable that loss has been incurred, generally subsequent to initial recognition of the asset

When losses are expected, in almost all cased upon initial recognition of the asset
Period to consider Not an explicit input to incurred loss model Contractual term
Information to consider Historical loss and current economic conditions Historical loss, current economic conditions, reasonable and supportable forecasts about future conditions (with reversion to historical loss information for future periods beyond those that can be reasonable forecast)
Unit of account Pooling generally not required, but permitted Pooling required when assets share similar risk characteristics

Scope of CECL: Inclusions and Exclusions

CECL’s scope is notably wide, encapsulating most financial assets held at amortized cost, among others:

  • Within Scope: This includes everyday financial instruments such as trade receivables and more nuanced off-balance-sheet credit exposures.

The scope of CECL includes the following:

  • Loan Receivables/Notes Receivables
  • Held-to-maturity debt securities
  • Trade receivables and contract assets that result from revenue transactions or other income
  • Receivables that relate to repurchase agreements and securities lending agreements
  • Loans to officers and employees
  • Cash equivalents

Outside Scope: Certain assets escape CECL’s net, including those measured at fair value through net income and specific other categories, highlighting the need for entities to assess their asset portfolios against CECL criteria meticulously.

Special Considerations under CECL

  • Operating Lease Receivables: Interestingly, while CECL initially seems to encompass operating lease receivables, a clarification exempts those accounted for under specific leasing guidelines, steering entities toward a nuanced application of the standard.
  • Trade Receivables: Even in scenarios where the risk of loss seems remote, CECL mandates the estimation of expected credit losses, introducing a slight exception for assets with historically zero losses under certain conditions.

Transitioning to CECL: A Look at Effective Dates and Methodologies

Adoption of CECL is primarily on a modified retrospective basis, compelling entities to adjust retained earnings at the start of the first reporting period in which CECL becomes effective. This approach emphasizes readiness and adaptation to the new standard’s requirements.

New Disclosure Requirements: Enhancing Transparency

CECL introduces comprehensive disclosure requirements designed to shed light on the credit risks within a portfolio and how they’re managed. These new requirements aim to provide stakeholders with a clearer understanding of an entity’s credit exposure and the judgments made in estimating expected credit losses.

Closing Thoughts

The shift to CECL represents a landmark change in accounting for credit losses, emphasizing a more proactive and informed approach to financial reporting.  Understanding the nuances of CECL, from its scope to disclosure requirements, is crucial. Business owners should seek specialized advice to navigate the complexities of CECL, ensuring their financial reporting aligns with the new standard and accurately reflects their credit risk exposure. Have questions? Contact Walter Shuffain for help with CECL.