In 2016, the Financial Accounting Standards Board (FASB) introduced a new impairment model, Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, commonly known as Current Expected Credit Losses (CECL).
In The ABCs of CECL, we provided a high-level overview of the new standard, including whom it impacts and when it becomes effective. In A Deeper Dive Into CECL, we discussed the impacted industries and laid out the phases of implementation. In this final installment of our three-part series, we’re taking a closer look at what implementation teams can do now to prepare and how you can leverage the skills and expertise of external resources to help the transition go smoothly.
Preparing for CECL today
In July of this year, FASB proposed delaying implementation of CECL until January 2023 for small reporting companies (as defined by the SEC), non-SEC public companies and private companies. However, as we’ve learned from the recent revenue recognition and lease accounting standards, implementation is complex and time-consuming. All impacted organizations should begin working now to ensure a smooth transition. Because data management is such a significant component of CECL, here are some ideas for what implementation teams can start doing now.
- Preserving loan data
- Developing a formal data management process for loan information
- Identifying available loan data as well as missing data and the cost of acquiring it
- Enhancing core knowledge of collateral values and credit score data along with being able to archive and update it in systems
- Improving the quality of guarantor data
- Evaluating which systems the data interfaces with
- Accumulating historical and economic data for forecasting purposes. For example, this may include unemployment rates, treasury rates, and the consumer price index.
Leveraging consultants in CECL implementation
Internal implementation teams can benefit from working with consultants who have a good understanding of the new accounting standard and its disclosure requirements. They can help you apply the standard from start to finish while taking current and future needs into account. Since most organizations don’t have the internal capabilities to successfully complete a project of this scope, stakeholders typically engage the expertise of consulting firms, like Parker + Lynch Consulting, to supplement their teams where skill-gaps exist and help drive projects through completion. Here are a few of the unique skillsets that can be leveraged using experienced consultants:
- Data management. Data management will be at the forefront of tackling the transition to an “expected lifetime loss” approach.
- Forecasting methodologies. In some respect, the new requirements will simplify accounting treatments. For example, impaired assets and non-impaired assets will no longer be treated separately. However, methodologies for life-of-loan loss estimates will take on a new dimension.
- Project management. Implementing CECL will be an enormous, cross-disciplinary, multiyear effort with significant risk and scrutiny at the regulator, board and external audit levels. The right consultant can help form an implementation plan that includes requirements gathering, development testing, parallel adoption and full launch, as well as provide frequent updates to the steering committee and board.
- Process design and documentation. A thorough, supportable, auditable and repeatable process for forecasting credit losses is essential. The requirements, methodologies, systems inputs, roles and responsibilities and approval methods will need to be transparent throughout the organization to satisfy financial statement auditors and regulators.
While the CECL standard is new, the skills it requires are not, nor is the principle of getting alignment across departments or satisfying the demands of auditors and regulators. For a change as sweeping as CECL, it’s crucial to partner with professionals with proven accounting and regulatory experience who fully comprehend the new standard and its implications.
Parker + Lynch Consulting is a professional services and consulting firm specializing in providing strategic solutions and project execution services within the CFO organization. Our focus areas include technical accounting, finance transformation, M&A integration, audit and PMO.
For more information on how Parker+ Lynch Consulting can help navigate CECL, visit wwww.parkerlynch.com.