The ABC’s of CECL

Posted: Aug 22  |  By: Parker + Lynch

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 Loss (CECL), the standard introduces a new model to estimate expected credit losses using historical information, current conditions and reasonable forecasts.

Preparing for and implementing CECL will impact all entities that borrow and lend money. As one of the most significant accounting changes in decades, CECL comes with some serious data requirements. Here’s an overview of what impacted entities need to know.

Who will be impacted by CECL?

CECL applies to any institution that issues credit, including banks, savings institutions, credit unions and holding companies following GAAP accounting standards.

The new standard will be a significant game-changer for the financial services industry, but it’s critical for all companies that hold financial instruments to understand how it will apply to them. If a business has an instrument that potentially has losses associated with it, they should gain an understanding of the requirements to implement CECL and how to develop an effective model for calculating expected credit losses going forward.

When is CECL effective?

CECL initially had different effective dates for different types of reporting entities.

  • Public business entities that file financial statements with the SEC must comply for fiscal years beginning after December 15, 2019.
  • All other public business entities must comply for fiscal years beginning after December 15, 2020.
  • Non-public business entities have until fiscal years beginning after December 15, to adopt the new standard.

The effective date for SEC-reporting entities remains 2020, but in July of 2019, FASB proposed extending the effective date for all non-SEC filers to 2023.


Institutions subject to International Accounting Standards Board requirements should have a head start on complying with CECL. Both standards introduce forward-looking models for estimating credit losses of financial instruments, but there are some distinct differences.

One of the primary differences is the projection of losses for financial instruments. Under CECL, businesses are required to project all credit losses over the life of the loan. IFRS 9, on the other hand, varies its projection requirement based on whether an asset is classified as:

Stage 1. Assets where credit risk has not increased significantly since its initial recognition.

Stage 2. Assets where the credit risk has increased.

Stage 3. Financial assets that are considered credit-impaired.

How consultants can help with CECL

Because expected credit losses must now be estimated and recorded upfront, then remeasured at each reporting date, companies must have relevant, objectively verifiable data and reasonable and supportable forecasts. For most organizations, the biggest challenge in compliance will be supporting their decisions, appropriately validating them, and explaining them to regulators and auditors.

Parker + Lynch’s experienced consultants can help organizations meet these challenges by:

      1. Identifying environmental factors, such as trends in the national and local economy, to incorporate into assumptions about future loan losses.
      2. Assisting with budgeting and forecasting processes, which will be evaluated by regulators and external auditors.
      3. Estimating expected future cash flows.
      4. Identifying, estimating and measuring credit losses.
      5. Preparing disclosures, including credit quality and management’s process for estimates.

CECL implementation is a multiphase process. It’s not going away, so companies need to start identifying people with the expertise to assess data and calculate current expected credit losses. Professional service firms like Parker + Lynch Consulting can help by  providing skilled expertise in the areas of financial analysis, financial modeling and forecasting. Being proactive about getting the help you need now can have a major impact on how well your organization fares implementing CECL.

Check back next week to catch the next part of our three-part series.

Parker + Lynch Consulting is a professional services 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.