Key Considerations for Financial Institutions Following CECL Implementation

As of January 1, 2023, all calendar year-end companies were required to adopt the current expected credit loss (CECL) model issued by the Financial Accounting Standards Board (FASB). This methodology accelerates the recognition of credit losses for financial institutions. Now, several months after companies were required to implement CECL, many financial institutions may be wondering how they can best prepare for external audits under the new accounting standard.

This article focuses on three key considerations for financial institutions following the implementation of CECL, which include the following:

Revisiting Modeling

After adopting the current expected credit loss methodology, financial institutions should plan to revisit their modeling on a quarterly basis. This includes tracking realized losses, assumptions, forecasts and expectations against actual values. For financial institutions who may have faced constraints during CECL implementation, due to a lack of time or data, and were not able to implement modeling as desired, these institutions should continuously work to revise their model until accurate.

Updating Internal Controls Environment

One of the primary areas auditors will focus their attention on is the internal controls environment. Specifically, how did the institution update their controls environment in accordance with the new standard? In some cases, this may mean the institution simply updated the design of controls surrounding the allowance for credit losses (ACL). Other times, this may involve identifying new controls which need to be implemented. In all scenarios, controls over data are key. This helps ensure the completeness and accuracy of data.

Ensuring Proper Documentation

During the implementation of CECL, most financial institutions were predominately focused on ensuring calculations were complete and accurate. Now, as institutions prepare for external audits under CECL, they should begin turning their attention to documentation. This includes preparing and updating accounting policies surrounding loans and investments under CECL as well as updating allowance memos, quantitative/qualitative support for assumptions made, and reasonable and supportable forecasts. In addition, financial institutions should be prepared to explain all calculations made and methodologies used as well as why these were selected. They should also be prepared to explain qualitative factors used and any changes made to them as well as any changes to the controls environment as a result of CECL.

For financial institutions that used third-party solutions to assist with CECL implementation, these institutions should inquire whether the vendor can provide documentation surrounding methodology, calculations and assumptions as well as if they performed testing on the model and if they have a Systems and Organization Controls (SOC) I or SOC II report. Financial institutions should also be prepared to provide memos on items the vendor was used for, peer data, proof of completeness and accuracy of data, documentation over loan pools and internal controls implemented surrounding the use of vendors.

It's been nearly one year since companies have been required to adopt the current expected credit losses methodology when estimating allowances for credit losses, and the work isn’t over yet. There are several areas to which financial institutions should now be turning their attention post-implementation. These include revising their modeling, updating their internal controls environment and ensuring proper documentation for external audits. For further assistance and guidance on what your financial institution should be focused on post-CECL implementation, consider reaching out to a trusted accounting advisor.

Kevin is a partner in The Bonadio Group’s Assurance practice. There, he works closely with a wide array of large-to-middle-market clients in a range of industries, which include food and beverage, manufacturing, fuel & energy, service providers and financial institutions. In addition, Kevin works with portfolio companies of private equity groups and entities with multi-national operations. Kevin’s responsibilities include the overall coordination and management of financial statement audits and other attest services including financial statement reviews, compilations and agreed-upon procedures engagements. In addition to performing attest services, Kevin also has considerable experience in the areas of cost accounting, business mergers and acquisitions, complex revenue recognition, leases and complex equity arrangements in start-up companies. Kevin received both his B.S. degree in accounting and his M.B.A. from St. Bonaventure University. Kevin has been a licensed CPA since 2011 and is a member of the American Institute of Certified Public Accountants.

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