Following the global financial crisis of 2007 and 2008, the Federal Accounting Standards Board (FASB) has taken steps to mitigate risk among financial institutions. One of the newest standards is a change from the “incurred loss” accounting model used to evaluate financial portfolios to an “expected loss” model known as the Current Expected Credit Loss model (CECL). For BHPH dealers, CECL will require changes in loan and lease loss recording, which in turn requires changes in the type of loan data collected and how it’s analyzed. This article outlines what BHPH dealers can do to prepare for this sweeping change and why it’s important to start planning now.
At a recent TIADA conference, BHPH dealers and related experts were discussing the impact of the Current Expected Credit Loss (CECL) model on their industry.
New Credit Loss Standards
CECL was announced in 2016 as part of a new Federal Accounting Standards Board (FASB) update, and it “represents the biggest change to bank accounting ever,” according to Mike Gullette, vice president, Accounting and Financial Management, for the American Bankers Association. The implementation deadline is by 2021 for all financial institutions. The deadline for SEC filers is 2020, and these entities will likely set a course that non-SEC filers will use to develop their own standards methodology.
This new standard impacts any financial entity with the following assets, including Related Finance Companies (RFCs):
- assets subject to credit losses and measured at amortized cost;
- certain off-balance sheet credit exposures, including
- held-to-maturity debt securities
- loan commitments
- financial guarantees
- net investments in leases
- reinsurance and trade receivables.
In essence, CECL is designed to make financial institutions examine the future risk to their portfolios, not based on actual incurred losses in the portfolio but on expected loss. This expected loss isn’t reliant on annual loss rates, but on expected “life of loan” data or life of portfolio loss rates.
In future blog posts we will drill down on some immediate impacts to the BHPH industry — specifically on loan portfolio data collection, analysis and loan covenant considerations.
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 firstname.lastname@example.org