CECL GAAP Frequently Asked Questions

Scope: The accounting standard update (ASU) applies to the following:

• Trade Receivables that result from revenue transactions
• Held-To-Maturity Debt Securities
• Off Balance Sheet Credit Exposures (unfunded commitments)
• Net investments in leases
• Loans
• Any financial asset with contractual right to receive cash and carried as amortized cost

Recognition Threshold: There is none. Impairment is based on expected—rather than probable or incurred—credit losses.

Measurement: Credit unions have flexibility in measuring expected credit losses if the measurements result in an allowance that:

• Reflects a risk of loss, even if remote
• Reflects losses that are expected over the contractual life of the asset
• Considers historical loss information, current conditions, and reasonable and supportable forecasts

The credit union must evaluate financial assets on a collective (pooled) basis if they share similar risk characteristics. If an asset’s risk characteristics are not consistent with the credit union’s other assets in the pool, the credit union should evaluate the asset individually.

Expected Credit Losses are estimated based on a combination of the following:

Past events, including historical information—This is the historical loss associated with financial assets having similar risk characteristics. This loss history can be internal or external.

Current Conditions—This includes adjustments to reflect current conditions, like changes in unemployment rates, property values, commodity values, delinquency, or other microeconomic and macroeconomic factors. Current conditions also include asset-specific adjustments.

The following are examples of factors a credit union may consider, depending on the nature of the asset:

• The borrower’s financial condition, credit rating, credit score, asset quality, or business prospects
• The borrower’s ability to make scheduled interest or principal payments
• The remaining payment terms of the financial asset
• The remaining time to maturity and the timing and extent of prepayments on the financial asset
• The nature and volume of the credit union’s financial asset
• The volume and severity of past-due financial assets and the volume and severity of adversely classified or rated financial assets
• The value of underlying collateral on the financial asset
• The credit union’s lending policies and procedures that govern:
  • changes in lending strategies
  • underwriting standards
  • collection
  • write-off and recovery practices
  • awareness of the borrower’s operations or the borrower’s standing in the community
• The quality of the credit union’s credit review system
• The experience, skill and ability of the credit union’s management, lending staff, and other relevant staff
• The environmental factors specifically affecting any lending concentrations in the loan portfolio

Please note that not all of these may be relevant to every situation, and other factors not on the list may also be relevant.

Reasonable and supportable forecasts that affect collectability—This would include adjustments to reflect changes between:

1. Historical information and conditions; and
2. A credit union’s forecasts of the economic conditions impacting the financing asset.

Credit unions with assets of $10 million or more must implement CECL in 2023. For most credit unions, the implementation date will be January 1, 2023.

Federal credit unions and federally insured state-chartered credit unions are nonpublic entities. Under Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326), CECL becomes effective for nonpublic entities, including credit unions, for fiscal years beginning after December 15, 2022.

Credit unions with total assets less than $10 million do not have to comply with CECL (12 U.S.C. §1782(a)(6)(C)(iii)), unless expressly required by State Supervisory Authorities under state law for federally insured, state-chartered credit unions.

Federally insured state-chartered credit unions may contact their accountant or state regulator with questions on the implementation of CECL.

An AUP report is not an independent financial statement audit. The Accounting Bulletin on the effective date for CECL is written for independent financial statement audits where an opinion is rendered by the auditors on a full set of financial statements.

A full set of financial statements is the balance sheet, income statement, statement of cash flows, and notes.

An AUP report would not set a precedent for a fiscal year to be other than a calendar year if a full set of financial statements is not normally included in the report. In most circumstances, an AUP report does not include a full set of financial statements for a twelve-month period. As most credit unions keep their books and records on a calendar fiscal year and file their Call Reports on a calendar fiscal year, most credit unions have set a precedent for the fiscal year to align with calendar year. Therefore, most credit unions will need to adopt CECL on January 1, 2023.

For the exception, see FAQ What establishes a precedent for a fiscal year to be other than a calendar year?

A Supervisory Committee Audit is not an independent financial statement audit. The Accounting Bulletin on the effective date for CECL is written for independent financial statement audits where an opinion is rendered by the auditors on a full set of financial statements.

A full set of financial statements is the balance sheet, income statement, statement of cash flows, and notes.

A Supervisory Committee Audit would not set a precedent for a fiscal year to be other than a calendar year if a full set of financial statements is not normally prepared as part of the report. As most credit unions keep their books and records on a calendar fiscal year and file their Call Reports on a calendar fiscal year, most credit unions have set a precedent for the fiscal year to align with calendar year. Therefore, most credit unions will need to adopt CECL on January 1, 2023.

For the exception, see FAQ: What establishes a precedent for a fiscal year to be other than a calendar year?

For credit unions, a precedent for a fiscal year that is not a calendar year can be established by:

• A financial statement audit, review or compilation by state licensed certified public accountants on a full set of financial statements for a twelve-month period other than for a calendar year.
  
  A full set of financial statements is the balance sheet, income statement, statement of cash flows, and notes.
• Regularly producing a full set of financial statements for a twelve-month period other than for a calendar year.
• The effective date of adopting other accounting standards, like ASC 842 – Leases.

The new Leases accounting standard required a “modified retrospective” implementation, which is at the start of the fiscal year. This is the same implementation language for CECL. If a credit union adopted the Leases accounting standard on April 1, 2022, that sets a precedent for aligning the fiscal year with the twelve-month period ending March 31, 2023.

You will not report CECL in the December 2022 Call Report unless your credit union is an early adopter of CECL (Call Report account AS0010). If your credit union adopts CECL on January 1, 2023, then the March 2023 Call Report cycle will be the first cycle to report the implementation of CECL. Among various required CECL related accounts on the Call Report, Schedule G, PCA Net Worth Calculation Worksheet provides input for the year of adoption (Call Report account NW0001) and the one-time adjustment to undivided earnings (Call Report account NW0002).

Because January 1, 2023 general ledger opening balances are also the December 31, 2022 closing balances, use the December 31, 2022 balances in estimating the ACL on loans and leases (AS0048), investments (AS0041), and off-balance sheet commitments (LI0003). Compare the pre-CECL allowance to the post-CECL allowance to determine the value of the increase (or decrease). Record this change in value to the undivided earnings (retained earnings) account (ASC 326-10-65-1(c)).

For example, if adopting CECL causes the ACL on loans and leases, on investments, and on unfunded commitments to increase by $50,000, $20,000, and $10,000, respectively, the January 1, 2023 journal entry is:

Going forward, credit unions will record changes (true-up adjustments) in the ACL balances at period-end in the income statement to the related accounts. These accounts are the provision for gain/loss (also known as credit loss expense) for:

• Loans and leases (IS0011)
• AFS debt securities (IS0012)
• HTM debt securities (IS013)
• Off-balance sheet credit exposures (IS0015)

This process is consistent with the former Allowance for Losses on Loans and Leases (ALLL) true-up adjustment process.

In June 2021, the NCUA issued a final rule, Transition to the Current Expected Credit Loss Methodology (12 CFR Part 702), to phase-in the CECL day-one effects on a credit union’s net worth ratio. With § 702.402(d)(ii), this rule also establishes:

• Federally insured credit unions with total assets of less than $10 million shall make charges for loan losses in accordance either with either:
  • (A) Any reasonable reserve methodology (incurred loss) provided it adequately covers known and probable loan losses; or
  • (B) In the case of Federally insured, State-chartered credit unions, any other applicable standard under State law or regulation

In the preamble of the rule, the “incurred loss methodology” is the GAAP used by FICUs before the adoption of CECL, which is FASB Accounting Standard Codification 450-20 (Loss Contingencies) and Accounting Standard Codification 310-10 (Loan Impairment).

Credit unions with total assets less than $10 million do not have to comply with CECL (12 U.S.C. §1782(a)(6)(C)(iii)), unless expressly required by State Supervisory Authorities under state law for federally insured, state-chartered credit unions.

A credit union must evaluate whether a financial asset in a pool exhibits similar risk characteristics. In evaluating financial assets on a collective (pooled) basis, a credit union should aggregate financial assets on the basis of similar risk characteristics, which may include any one or a combination of the following:

• Internal or external (third-party) credit score or credit ratings
• Risk ratings or classification
• Financial asset type
• Collateral type
• Size
• Effective interest rate
• Term
• Geographical location
• Borrower industry/NAICS Code
• Vintage
• Historical or expected credit loss patterns
• Reasonable and supportable forecast periods

Please note that not all of these may be relevant to every situation, and other factors not on the list may be relevant.

When a financial asset does not share similar risk characteristics with the pool being evaluated, evaluate that asset individually. This requirement is similar to the former GAAP guidance under Loan Impairment (ASC 310-10). Credit unions should be aware that the definition for “individually assessed” may include assets that were not considered previously impaired (for example, large, unique credits) or exclude assets that were considered previously impaired. It may not be effective to simply evaluate impaired listings individually because the asset may not fall into the same category as it did before CECL.

The Reasonable and Supportable Forecast (R&S Forecast) is a prediction of an asset pool’s performance based on specific inputs and adjustments that capture conditions not reflected in the historical loss information.

A credit union must consider reasonable and supportable forecasts when it uses historical credit loss experience to determine the allowance for credit losses.

“An entity shall not rely solely on past events to estimate expected credit losses. When an entity uses historical loss information, it shall consider the need to adjust historical information to reflect the extent to which management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated.” (ASC 326-20-30-9)

No. CECL does not prescribe a specific method for estimating R&S Forecast periods, and it does not include any specific guidance on a maximum or minimum length time. The standard makes it clear that management’s allowance estimates must be based on management’s expectations. For financial and regulatory reporting purposes, credit unions should support and document their R&S Forecast periods. Generally, a longer period will be less reliable and more difficult to justify as “reasonable.”

Some credit unions may be able to develop a R&S Forecast for a period to cover the contractual term of the financial asset or a group of financial assets, but if this is not possible, the credit union can use historical loss information determined in accordance with the CECL accounting standard (ASC 326-20-30-8). For periods that are beyond the period of the R&S Forecast, a credit union should not make adjustments to historical loss information. A credit union may revert to historical loss information at the input level or based on the entire estimate. A credit union can also revert to historical loss information immediately, on a straight-line basis, or using another rational and systematic basis.

As an example, if the period of the R&S Forecast is two years for a group of assets with contractual terms that are five years, then at the beginning of the third year, a credit union can revert to historical loss rates to estimate losses for the period after the R&S Forecast.

The Reversion to Historical Loss Information Period comes after the period of the R&S Forecast and is the transition period to historical loss rates. The reversion period only applies to those credit unions that cannot develop a R&S Forecast to cover the contractual term of the financial assets. Those credit unions will need to revert to historical loss rates for the periods beyond which they can develop a R&S Forecast. A credit union can also revert to historical loss information immediately, on a straight-line basis, or using another rational and systematic basis.

It is important to consider and evaluate management’s reversion policy, as well as the methodology to derive the historical loss rate average (for example, the relevance of the length of the lookback period).

A credit union can choose to revert to historical loss information over a period shorter than the asset’s remaining contractual life if the credit union’s management believes that such reversion would result in a better estimate of expected credit losses.

Yes. Though, a credit union is not required to use the same economic forecasts for all management and planning activities. Whatever forecast method used, it must be relevant to the loan portfolio segment.

PCD replaces the prior guidance on PCI assets. The “significant” deterioration criteria is now “more-than-insignificant” deterioration. This change will cause more financial assets to fall within the scope of this definition.

Under CECL, there is a “gross up” accounting method that adds an initial allowance for credit losses for PCD financial assets to its purchase price. Accordingly, there is no initial income statement impact in the period of adoption or at acquisition. This impact is embedded in the purchase price of the PCD asset. Also, credit losses, at acquisition and subsequently, are not recognized through interest income.

On October 12, 2022, the Financial Accounting Standards Board decided to amend the term purchased with credit deterioration (PCD) to purchased financial assets (PFA). The Board also decided on seasoning criteria and that financial assets acquired in a business combination should be presumed seasoned.

HTM debt securities are covered under the new CECL guidance. Credit unions will calculate the allowance based on their chosen method for HTM debt securities (Discounted Cash Flow, PD/LGD, etc.) on a collective (pooled) basis, much like the method used for loans. It is important to note that different treatments may be required across the investment products (U.S. Treasuries, agency-back mortgage securities, other asset-back securities). Credit unions should consider applying consistent approaches across assets with similar risk characteristics to those in its lending portfolios (for example, mortgages, auto, student, etc.).

There is no allowance required for credit losses on HTM securities where risk of non-repayment is zero (ASC 326-20-55-48 to 50), such as government backed securities. This includes securities from the government sponsored enterprises of the Federal National Mortgage Association (Fannie Mae), the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac).

AFS debt securities must be evaluated individually for impairment if the fair value is less than the carrying amount (amortized cost), and

• The credit union intends to sell the security, or
• It is more likely than not that the credit union will be required to sell the security, or
• The credit union does not expect to recover the amortized cost basis.

In the event that a credit loss exists, calculate and record an allowance using the Discounted Cash Flow approach.

For both HTM and AFS debt securities, write-offs are recorded when uncollectible.