What is CECL?
CECL stands for current expected credit losses, the new method of recording the allowances for expected credit losses for accounts receivable balances.
The FASB issued guidance in 2016 that replaced the existing incurred loss impairment methodology with one that reflects expected credit losses and requires consideration of a more robust range of reasonable and supportable information about credit losses.
Rather than using the historical as-incurred basis, the new guidance requires that companies estimate the losses expected over the lifetime of a financial instrument in its scope. For most companies, this will result in using their historical experience as a benchmark, then adjusting upward or downward to reflect their expectations based on external data.
Non-Compliance is Not an Option
CECL compliance is compulsory for all companies with assets in scope, and private companies with calendar year-ends must be compliant for the year ended December 31, 2023.
What Does CECL Apply To?
CECL applies to the following items:
- Trade receivables
- Net investments in leases by lessor
- Debt securities held to maturity
- Off-balance sheet credit exposures
- Loan commitments
- Reinsurance recoverables
5 Steps to Compliance
1 | Due Diligence
Before deciding your next move, you first need to understand which direction to go.
2 | Establishing a Team
The new standard will creep its way into many different departments within your organization, and it’s important to identify and align yourself with the key players.
3 | Identifying Gaps
Before you execute, you must take a deep dive into your strategy to pinpoint potential pitfalls and roadblocks in your current process.
4 | Creating a Plan
When taking on a major adoption, it is in your best interest to address each issue one by one and break it down by sections.
Click here to learn more about how you can stay ahead of the curve in implementing CECL requirements in your business .
