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MEMBER OF ALLINIAL GLOBAL, AN ASSOCIATION OF LEGALLY INDEPENDENT FIRMS 2017 Wolf & Company, P.C.
CECL Workshop
Implementation Considerations
Jim McGough, CPA, CGMA
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Introduction
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Jim McGough, CPA, CGMA
Senior Audit Manager
jmcgough@wolfandco.com
mailto:jmcgough@wolfandco.com
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Disclaimers
Slides in this presentation are used to facilitate
discussion and are not recommendations
Methods and analysis presented here are not meant
to be comprehensive nor appropriate in all
circumstances
FASB examples and excerpts presented here are not
meant to be comprehensive nor appropriate in all
circumstances
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Agenda
CECL Transition Where to start
Implementation Considerations
Loan pools
Appropriate methodology
Historical loss data
Reasonable and supportable forecasts
Disclosure Considerations
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CECL Transition Where to Start
1. Learn the standard, and understand the basis for
conclusions included therein.
Principles-based standard
Requirements of the standard and best
practices will evolve
Effective for calendar year entities: o 2020 for public business entities (PBE) that are SEC filers,
including interim periods
o 2021 for other public business entities, including interim periods
o Dec 31, 2021 for all others
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CECL Transition Where to Start
2. Establish your working group, including
professionals outside the accounting function
such as lending, IT, risk management.
CECL is a critical estimate for the senior
management team
Delineation of roles and responsibilities for
personnel involved in the estimation process
When to involve internal audit?
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CECL Transition Where to Start
3. Develop your project plan, including
governance/oversight and milestone dates.
Define responsibilities
Assess data needs (build and test)
Establish time frames and milestones
Dry/parallel runs
Determine implementation has appropriate resources
and priority
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CECL Transition Where to Start
4. Incorporate internal control considerations along
the way to achieve design effectiveness
Written policies and procedures
Completeness and accuracy of data
Management review and approval
Process must hold up under a quarterly frequency
Outsourced model might be in scope of supervisory
guidance for model risk management.
Can the estimate be validated/audited?
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CECL Transition Where to Start
5. Communicate with your auditor and primary
regulator.
Scalability of the model exposes the bank to regulatory
interpretation
Regulatory agencies will develop supervisory guidance
to clarify expectations but will not provide an approved
model or example calculation
Best practices will evolve
Conclude on PBE status with external auditor so there
are no surprises with effective date
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Implementation Considerations
Determine loan pools (those with similar risk
characteristics)
Identify an appropriate methodology for each loan pool
Obtain sufficient historical loss data
Develop reasonable and supportable forecasts
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Loan Pools
Loan pooling is a critical decision point; impacting all
subsequent actions
Does not prescribe a unit of account, but does require
pooling of assets with similar risk characteristics.
Loan segments utilized for current GAAP or call report have
to be reevaluated
Excessive aggregation/disaggregation may be problematic.
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Loan Pools Risk Characteristics
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In evaluating financial assets on a collective (pool) basis, aggregate financial
assets on the basis of similar risk characteristics, which may include
any one or a combination of the following (the following list is not intended to
be all inclusive):
a. Internal or external (third-
party) credit score or credit
ratings
b. Risk ratings or classification
c. Financial asset type
d. Collateral type
e. Size
f. Effective interest rate
g. Term
h. Geographical location
i. Industry of the borrower
j. Vintage
k. Historical or expected credit loss
patterns
l. Reasonable and supportable
forecast periods
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Loan Pools Where to start
Using your loan footnote consider the list of risk attributes in
the ASU for each segment:
Identify 2 to 3 primary risk characteristics and consider if these are
generally consistent within the segment
Are actual losses significant?
Other than ALL estimate, does management evaluate the loans at a
different level?
Is the loss emergence period known?
Can expected loan life be estimated for the segment as is?
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Loan Pools Exclude Certain Loans
Estimated credit loss for an asset should be measured
individually if there are no similar risk characteristics with
other loans.
Practical expedients (FV of collateral) exist for:
Collateral-dependent loans (borrower experiencing financial
difficulties and repayment expected through sale or operation of the
property)
Loans secured by collateral maintenance provisions
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Appropriate Methodology
GAAP requirement is explicitly scalable and allows
preparers to develop estimation methods that are
appropriate and practical for their circumstances.
One impairment model but many methods
Methodology by loan segment should be
determined early because relevant data and
software needs may vary.
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Appropriate Methodology
FASB concluded that different outcomes for expected
credit losses are acceptable, given different levels of
complexity and sophistication.
Principles based
Scalable
FASB provided examples that illustrate implementation in a
noncomplex environment. (Example 1 in the ASU)
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Appropriate Methodology
Considerations for scalability:
What is the entitys strategic plan and who will be relying on the financial
statements now and in the immediate future?
Does the primary banking regulator classify the entity as a smaller, less
complex institution?
Would the cost of a more complex methodology exceed the benefits? The
result may not be better, and model/error risk may be elevated.
Is a sophisticated model required or desired for any segment based on the
nature of the loans and relevant loss history?
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Historical Loss Data
An entitys loss history loss remains as the starting point
and generally provides a basis for expected credit
losses.
GAAP does not specify a particular methodology for
determining historical credit loss experience. That
methodology may vary depending on the size of the entity,
the range of the entitys activities, the nature of the entitys
financial assets, and other factors. [ASU 326-20-55-2]
The loan segment and the chosen method will determine the
data needs.
Historical data is still adjusted using qualitative factors
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Reasonable and Supportable Forecasts
Identify risk drivers for each loan segment
For example, real estate values and unemployment rates for mortgage loans
Q-Factor analysis will document whether historical loss data requires adjustment
based on the forecast for these drivers.
Entities are required to adjust for reasonable and supportable forecasts of the
future, by adjusting historical loss information for future expected events that
are not reflected in historical losses.
For periods where an entity is unable to support its forecast, it is required to
revert to historical loss information.
Consider consistency with other forecasts within the entity (ALM, risk
management, MSR valuation, budget, capital planning, other loan segments).
Some entities may begin with external forecasts (e.g. Federal Reserve) and
adjust to what management foresees in its area of operations.19
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Reasonable and Supportable Forecasts
The adjustments for current conditions and reasonable and
supportable forecasts may continue to be qualitative, similar
to the approach applied by many institutions today.
More robust quantitative models and/or greater segmentation may
result in a smaller qualitative component, depending on the
circumstances.
Q-Factor adjustments may be more significant because of the life-
of-loan measurement period.
Qualitative analysis may not always be directionally consistent
with current trends/events.
For example, an increase in delinquency rates may have been
previously considered/anticipated when estimating expected credit
losses.
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CECL Disclosures
Disclosures are similar to current GAAP but expanded
Credit quality indicators (CQI) by class of financing receivables
Disclose amortized cost by vintage for 5 years
For purchased assets use issue date, not date acquired
Not required for non-PBEs
Not required for trade receivables or revolving lines
Credit quality indicators (CQI) by major security type
Vintage information is not required
Rollforward of ACL by loan segment and major security type
a. Beginning balance
b. Provision for expected credit loss
c. Initial allowance for PCD assets (i.e. gross-up recording)
d. Write-offs
e. Recoveries of write-offs
f. Ending balance
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CECL Disclosures
Example CQI disclosure by vintage:
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CECL Disclosures
PCD Assets In period acquired: disclose purchase price, ACL at acquisition, non-credit
discount/premium, and par value
Collateral-dependent financial assets Describe the type of collateral by class of financing receivable and major security type.
Qualitatively describe the extent to which collateral secures these assets and
significant changes in coverage during the period.
Off-balance-sheet credit exposures Policy, methodology and charges during period
Past-due loans (no change)
Nonaccrual loans (no change)
TDRs (no change)
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CECL Disclosures
How estimates are developed by management
Policies and methodology used and discussion of factors including:
Past events, current conditions, reasonable and supportable forecasts
Identify changes in methodology or policies, reason for change, and quantitative effect
of changes
Risk characteristics for each segment
Changes in factors that influence the current estimate and reason for change
Reasons for significant changes in the amount of write-offs
Reversion method applied for periods beyond forecastable period
Significant purchases, sales, reclassifications of financial assets relevant to ACL
estimate
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Questions
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Thank you!
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Jim McGough, CPA, CGMA
Senior Audit Manager
jmcgough@wolfandco.com
mailto:jmcgough@wolfandco.com
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