Inside the New Credit Loss Model: Requirements and Implementation Considerations

For most financial services entities – including banks, thrifts, credit unions, insurance entities, and specialty finance entities – implementation of the new current expected credit loss CECL model contained in ASU 2016-13 is the most significant financial reporting change in decades. The new accounting model issued for the recognition and measurement of credit losses for loans and debt securities is replacing the incurred loss model of estimating credit losses that is in current U.S. GAAP.

The CECL methodology has potential negative effects on capital, earnings projections, and credit risk decisions for the financial services industry. Under CECL, credit losses will be recognized sooner and on a complete contractual life basis. This means that, upon origination, the lifetime contract loss estimate for that financial asset will be reflected in the financial statements and continually re-measured throughout the life of the financial asset.

The article explains requirements of the new standard and what financial services entities need to take into account before, during, and after its implementation.