Companies lag on getting ready for CECL

Many banks and financial institutions are encountering challenges in preparing for the Financial Accounting Standards Board’s credit losses standard, according to a new survey.

Only 32 percent of a group of more than 100 accounting professionals polled by Deloitte and Bloomberg Tax at a conference earlier this month reported that their organization has begun to develop internal controls and processes to implement the credit losses standard, which is often referred to as CECL because it uses a Current Expected Credit Losses model. Meanwhile, 41 percent said their biggest challenge to implementation right now is their lack of a good understanding of the standard.

The survey also found that 26 percent of the CFOs, controllers, financial accountants, auditors, analysts and other accounting professionals polled at the conference said they are most concerned about the costs of resources and manpower and gaining clarity around year-one disclosures. More than 33 percent of the executives polled were unsure if their organization has identified all of the relevant financial assets that will be affected by the standard. In addition, 19 percent of the executives polled reported that their organization still hasn’t begun the process of implementing the standard, putting them at risk for fire drill scenarios.

CECL implementation readiness

Some larger financial institutions have been doing dry runs with FASB in testing out the new standard, but some smaller banks, particularly credit unions, are hoping for changes and delays in the standard. FASB recently proposed to offer a fair value option to help with transitioning to the new standard (see FASB offers fair value option to ease CECL transition).

Jon Howard, a senior consultation partner in the Financial Instruments Group of Accounting Services at Deloitte & Touche, who is part of the FASB transition resource group for CECL, said the polling results were consistent with what he was expecting.

“Generally speaking, most of the people that attended this event were probably more on the larger institution size,” he said. “As far as CECL readiness — certainly in the banking space and maybe slightly behind but also kind of getting up to speed in the insurance space — the large players are at a point where they're already trying to do some form of parallel runs or dry runs. They're pretty far down the path of which models they're going to use, and they really just want to make sure that they can run those in a test run in an internal control environment — and also, if they're public, knowing that the SEC wants to start seeing disclosure in their 10-Qs that as we get closer to adoption has a little more granularity to it, with more numbers and explanations behind the numbers. I think we're going to start seeing more of it probably with the second quarter 10-Qs of maybe some of the larger institutions giving up a little bit more. So far there have just been a handful that have at least put some numbers on their estimated impact.”

The few banks that have given out estimates have varied so far. “I've only heard of two of the big players, Chase and Wells Fargo, that have disclosed, and Chase said theirs is going to go up and Wells Fargo said their estimate is going to go down a little bit,” said Howard. “There's a lot that could change between now and adoption as far as what their portfolio looks like, and as they do more parallel runs and dry runs and maybe tweak some of their processes. But that's in the big player space. I think the community banks are in various stages. Some are trying to do the same sort of path. If they have an extra year or two, they're certainly going to take it. And others are still just trying to get their arms around it. If they're not public, they don't have to adopt it on January 1 of this year so they get some more time. But they're just now starting the process with service providers to help with models and things of that nature.”

The Financial Accounting Standards Board and the International Accounting Standards Board were unable to agree on their approach to accounting for expected credit losses in U.S. GAAP and International Financial Reporting Standards, but Howard hasn’t heard of many problems so far with the divergence between the two models.

“I don't know that I would say it's causing much of a problem,” he said. “I'm sure they would prefer that they didn't have to run two different models. I bet the larger ones wish there was convergence, but which model they prefer — IFRS vs. U.S. GAAP — I’m not sure. There are some complexities with IFRS 9. You have to monitor when to move things from bucket one into the other buckets, and move from one year of losses to lifetime losses.”

The poll also asked the attendees about what method they’re currently using to figure credit losses. “On a CECL perspective what I did find sort of interesting is one of our polling questions was asking what method an organization currently uses most often, and that's something the FASB just put out a Q&A on fairly recently, at the encouragement of some of the banking regulators, because it’s their understanding that that's something that a lot of smaller institutions would want to use. I think that the difficulties that have been happening in practice on that is that it's a little bit hard to understand when it's appropriate because it makes a lot of very simplifying assumptions to it in that your portfolio has been growing but none of the risks have been changing. We even heard anecdotally that some people said they were glad you put in here a certain number of basis points to use as a qualitative factor and the FASB said they just had that as an example. There was really nothing behind the number itself, though. But that's something that in theory the smaller players with less complex portfolios have been looking for and they probably weren't as represented at this Bloomberg conference. Frankly those wouldn’t be as far along enough in the process to say which method they currently use. They're just trying to figure out which method they can use.”

The poll respondents indicated that 37 percent are using the probability-of-default method, 28 percent are using the discounted cash flow method, 14 percent are using the loss rate method, 0 percent were using the weighted average remaining maturity (WAIT) method, and 21 percent said none of the above.

The survey also asked about the hedge accounting standard that was also part of the financial instruments convergence project along with CECL. It found that 33 percent of the respondents said their organizations have already implemented the standard, and 21 percent plan to adopt it in 2019.

“A lot of the public companies have already adopted it,” said Howard. “We’ve seen a big expansion in foreign currency hedging and some people taking advantage of it. But it wasn't too surprising to see people that had already implemented it or were adopting it in 2019.”

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