CECL Considerations for Dealerships
The ECL will be reported in current earnings as an allowance for loan and lease losses (ALLL) in your entity’s financial statements. Because this new methodology could adversely affect a BHPH dealer’s net worth on financial statements, dealers will need to factor in CECL considerations and how adjusted financial statements could impact existing bank loan covenants or other credit agreements.
Banks will be aware of potential changes among their customers, but proactive communication will be important to ensure that relationships and access to credit remain intact.
Besides big changes in accounting methodologies for RFCs, it remains to be seen what this FASB standard means for established BHPH dealers seeking future access to traditional capital. BHPH loans, by their nature, are short-term loans with a high risk of default. Dealers rely on strong relationships with financing arms to purchase inventory and maintain operations through the ebb and flow of customer transactions and variable payment plans. As banks and other third-party financing arms adopt some form of CECL model for their portfolios, they will weigh the expected risk of loans even more heavily than before — which may limit their participation in financing higher risk industries like BHPH.
Well-managed BHPH dealerships can maintain strong cash flow by keeping customers in cars, collecting payments consistently, diversifying sources of revenue and reinvesting in a variety of inventory. As we have discussed in , there are ways to improve the scale and structure of your dealership to add value to the loan portfolio. We focus on your relationship with financing, your tax returns and operational changes to improve profits.
In light of this new federal accounting standard for monitoring and calculating expected credit losses, BHPH operators of all sizes will likely require additional professional support. A CPA knowledgeable in BHPH operations can help you determine the standard’s impact on your current accounting methods, monitoring and reporting. Talk to the audit group at Cornwell Jackson to start planning for internal and external finance changes in the next few years.
Mike Rizkal, CPA is the lead partner in Cornwell Jackson’s Audit and Attest Service Group. He provides advisory services, including financial audit and attest services, to privately held, middle-market businesses. Contact him at email@example.com