Allowance for credit losses & CECL

Option to delay current expected credit losses (CECL)

CARES Act provides option to delay GAAP provisions

On April 3, 2020, the chief accountant of the Securities and Exchange Commission (SEC) issued a statement noting the CARES Act provides the option to temporarily defer or suspend the application of two provisions of GAAP and would be in accordance with GAAP. The two provisions of the act are Section 4013 and Section 4014, “Optional Temporary Relief From Current Expected Credit Losses.”

As such, eligible registrants can elect to take the delay. Registrants must make the election for the first quarter.

During the delay, a registrant would continue to use the incurred loss model for the allowance for loan and lease losses (ALLL) for each quarter. The delay ends the earlier of the termination of the national emergency or Dec. 31, 2020.

Based on consultation with the SEC staff, the following illustrates when the delay ends and how transition occurs:

• If the national emergency terminates on June 5, 2020, adopt CECL that quarter (June 30, 2020), retrospective to Jan. 1, 2020.
• If the national emergency terminates on Nov. 1, 2020, adopt CECL that quarter (Dec. 31, 2020), retrospective to Jan. 1, 2020.
• If the national emergency does not terminate by Dec. 31, 2020, adopt CECL as of Dec. 31, 2020, retrospective to Jan. 1, 2020.

The result is all calendar year registrants will reflect CECL in their 2020 Form 10-K.

On Nov. 15, 2019, the Financial Accounting Standards Board (FASB) had updated the effective date of the CECL standard for certain small public companies and other private companies. The revised effective dates of the standard they updated at that time were as follows.
 

ASU 2016-13 (credit impairment) effective dates

¹ As defined by the FASB Accounting Standards Codification Master Glossary. The FASB’s decisions maintain the current effective date for Accounting Standards Update (ASU) 2016-13 for Securities and Exchange Commission (SEC) filers other than SRCs but would provide SRCs and all other entities with extra time to adopt ASU 2016-13.

² Includes all other public business entities (PBEs), including SRCs, private companies, not-for-profit organizations, employee benefit plans, and emerging growth companies that have elected to adopt new accounting standards using private company effective dates. To determine if an entity qualifies as an SRC, the entity would use its status as of its most recent testing date under SEC guidance upon issuance of the codification change.

The FASB reaffirmed its decision to permit early adoption for all entities for fiscal years beginning after Dec. 15, 2018, including interim periods within those fiscal years.