The Financial Accounting Standards Board proposed this summer to again delay the effective date for the Current Expected Credit Losses (CECL) standard, Accounting Standard Update 2016-13 (Topic 326), for small public lenders, private lenders and nonprofits, such as credit unions. ASU 2018-19 previously extended the effective date for these entities.
The proposal would extend the beginning effective dates from 2021 to 2023 for small public business entities and from January 2022 to January 2023 for nonpublic companies. Public companies with a public float of less than $250 million, or annual revenue of less than $100 million and either no public float or a public float of less than $700 million, are defined as a small public business entity.
For large public banks, which FASB defines as SEC filers excluding small reporting business entities, CECL will continue to be effective for annual and interim periods beginning in 2020. The extension would not impact early adoption, which is allowed in 2019 for all entities.
How to take advantage of the effective date extension (i.e., what you should be doing now)
As with most new FASB pronouncements, the additional implementation time will provide smaller entities with the opportunity to learn from larger companies. The difference is that CECL is highly dependent on a reporting entity’s historical experience with its credit losses. These are internal capabilities which are more difficult to co-opt.
This means understanding your data environment and identifying CECL data gaps now is extremely important. For your historical data to be relevant by the implementation date, the data captured and existing data quality need to be correct.
In my personal experience, many companies do not capture necessary data, and often the data captured is either corrupt or in multiple systems (formats) that cannot integrate. To ensure entities have reliable and proper historical data accumulated when they implement CECL, they should start by:
- Cleaning up existing data to establish a clean starting point (consider engaging a database administrator);
- Identifying gaps in existing credit data or areas with inconsistent data capture;
- Identifying the correct CECL data to collect;
- Designing and implementing standards for data capture protocol going forward so that you have the proper historical data when needed for implementation.
To assess CECL, reporting entities will need credit experience data reflecting full credit cycles during different economic cycles. Economic cycles last many years, which greatly expands the historical data period required.
Much of CECL implementation will be a circular function. Credit loss and risk assessment methodologies will impact data requirements. Yet, reporting entities need to begin collecting data now. FASB allows significant flexibility in CECL methodologies, and unique loan portfolios will fit better with different CECL methodologies.
Despite this circular function, reporting entities should not wait to address their data needs until after establishing CECL methodologies. Reporting entity credit experience data not captured may be lost forever, which is why you should be addressing data now.
