What should your bank or credit union be doing right now?
Every financial institution should be in the process of preparing for the upcoming budget and strategic planning cycle. Accounting and finance departments are busy filing the quarterly call report and starting to reforecast the balance sheet and income statements for remainder of 2018 while looking ahead to 2019 and beyond. The CEO and CFO are preparing for the annual planning retreat with the senior management team and the board of directors. This most important annual ritual may have an unexpected elephant in the room this year. It has a name, and it is current expected credit losses methodology (CECL).
FASB introduced CECL to the financial institution world on June 17, 2016. Under CECL, the allowance for credit losses is a valuation account, measured as the difference between the financial assets’ amortized cost basis and the net amount expected to be collected on the financial assets (i.e., lifetime credit losses). CECL applies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investment in leases, and reinsurance and trade receivables, as well as certain off-balance sheet credit exposures, such as loan commitments. To estimate expected credit losses under CECL, financial institutions will use a broader range of data than under current existing GAAP. Given the fact that the allowance for loan and lease losses (ALLL) reserves may increase under this new forward looking approach, preparation and communication is key to avoid any risk to the financial institution.
According to a recent survey by one of the largest financial institution system providers, only 3.5 percent of financial institutions consider themselves to be “very” prepared for CECL, while 59 percent consider themselves not at all or a little prepared. Given that public companies must comply with fiscal years beginning after December 15, 2019, while most banks must comply after December 15, 2020 and credit unions after March 15, 2021, the time to start preparing is now.
The resources, data, effort and financial implications required to comply with CECL, needs to be addressed by the senior management team – including the board of directors. As senior management begins to think through changes that may be necessary to their processes, systems and controls in order to implement the CECL model, they should also consider the evidence and documentation that provide a strong governance and internal control framework to support their estimates.
To learn more about how RSM can assist you with your strategic planning process, evaluating CECL, or additional business needs, contact RSM’s management consulting professionals at 800.274.3978 or email us.