Current Expected Credit Losses (CECL)

What is CECL?

CECL is short for “current expected credit losses” and is a new accounting standard that defines and fundamentally changes how companies account for expected credit losses. After the 2008 recession, the Financial Accounting Standards Board (FASB) released its Accounting Standards Update (ASU) on Financial Instruments – Credit Losses (Topic 326), replacing prior standards known as FAS-5 and FAS-114. This update requires the immediate recognition of management estimates of credit losses for assets held at amortized cost and aims to reduce the overall complexity of GAAP reporting by reducing the number of impairment models used by entities for debt instruments.

The new CECL standard applies to all institutions issuing credit; insurers, asset managers, and public organizations filing under GAAP; banks; and savings institutions. All entities holding net investments in leases and financial assets not accounted for at fair value through net income are affected.

Why is CECL important?

The changes under CECL require a deeper understanding of loss modeling, analysis, and reporting compared to the old standards. The most significant change is the transition from a reactive incurred loss model to a forward-looking expected credit loss model. CECL also removes the probable cause threshold and requires a lifetime loss allowance to be set on day one of each exposure.

The process of forecasting for credit losses has also changed. The underlying models and loss aggregations for setting loss allowances have been adjusted. Without a proper solution supported by active regulatory experts, accounting teams can easily be left in the dark on how to best implement new regulations.

Legacy tools burden users with the time-consuming process of manually implementing regulations. Having a partner like Clearwater Analytics, which provides automated regulatory compliance, allows companies to analyze data and focus their resources on growth as opposed to tedious tasks.

Successful CECL adoptions require:

  • More granular and complete data to support increasingly complex expected credit loss models
  • Transparency in the application of assumptions and the disclosures around the allowance estimates
  • Operational support for increased level of disclosures
  • A solution with an open design that easily adapts to changing regulations

How Clearwater Helps:

Over 80% of current Clearwater clients are affected by CECL, meaning we have developed the experience needed to efficiently configure and automate key CECL processes for our users. All the reporting available within Clearwater is generated daily, allowing teams to maximize their day and start every morning with access to fully reconciled data from any web browser.

Clearwater proactively updates the system prior to any regulatory changes to provide users with the tools necessary to handle new regulations. Specifically, CECL updates to the general ledger were made, new reports were created, and thorough documentation efforts were made by our team of accounting experts. In our reporting suite, we offer a variety of customizable impairment reports, which give you the tools needed to formulate a plan each quarter to determine which assets will be written down through a CECL allowance, which will be sold, and which should be continually watched.

Other useful CECL reports we offer can be found in our blog, Impairment Analysis: Key Clearwater Reports, and include specific use cases for reports, such as:

  • Impairment/Allowance
  • Allowance for Credit Losses Roll-Forward
  • PCD Reconciliation
  • And more

Clearwater is committed to continually evaluating emerging investment accounting regulations. Our subject matter experts and product owners are active in the industries we serve and stay ahead of upcoming changes by strategizing and optimizing the relevant features of our solution. Dedicated client servicing teams work closely with each user to ensure their operations exceed industry standards and their teams are prepared when new regulations take effect.

Are you confident in the quality and timeliness of your investment data? If not, speak directly to an expert today for a free evaluation of your investment accounting and reporting processes.

Discover how transparency in accounting analytics can make a difference in your business today.