Charles Soranno, Managing Director, Financial Reporting Remediation & Compliance
As Protiviti reported back in May, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been looking for lessons in the global banking crisis of 2007-08 and have come up with new forward-looking predictive models for financial institutions to use when estimating how much to reserve against potential loan losses.
The FASB’s CECL model will become effective in 2020, with the IASB’s International Financial Reporting Standard 9 (IFRS 9) standard beginning that year if early adoption is not elected. Protiviti strongly recommends immediate action because of the extensive changes in data-collection practices, systems configuration, loan classification and risk modeling required by the change.
The new impairment model from FASB, which applies to banks, savings and loans, credit unions, and non-bank lenders in the United States, and global institutions traded on U.S. exchanges, is called Current Expected Credit Loss (CECL). Final guidance on the model was issued on June 16, 2016. The new impairment model from IASB, which applies to institutions based outside the United States, is a part of IFRS.
For a detailed analysis of these new methodologies, see Protiviti’s Point of View briefing, Impact of the New Current Expected Credit Loss (CECL) Methodology, and the companion paper, IFRS 9 Impairment — Practical Implications. Both models are discussed, along with implementation considerations, in our Aug. 17 webinar, “Impact and Challenges of CECL and IFRS,” available in our online webinar archive.
The methodologies are similar in that they both replace traditional reserve requirements based on historical losses with new predictive models incorporating past, present and future data, as well as market intelligence and macroeconomic trends. The primary difference is that IFRS 9 uses a three-stage loan classification model not included in CECL.
The basics of these two methodologies have been covered in our previous blog post, so we don’t want to rehash them here, but we do want to share some implementation considerations we discussed in the webinar. Successful implementation is going to require an enterprisewide effort with input from most, if not all, departments. Some of the bigger details to be worked out include:
- Gathering required data assets/history to feed the new model requirements
- Creating underlying models and IT infrastructure for determining the required reserves
- Identifying required business process updates, along with resources required to validate the updated reserving methodologies
Specific deadlines for CECL include:
- SEC filing institutions effective for years beginning after Dec. 15, 2019
- Non-SEC filing public business entities effective for years beginning after Dec. 15, 2020
- All other entities, plus nonprofit organizations, effective for fiscal years beginning after Dec. 15, 2020, and interim periods with fiscal years beginning Dec. 15, 2021
IFRS 9 is effective for all entities for annual periods beginning on or after Jan. 1, 2018, but firms may choose to adopt the standard early.
Protiviti is already working closely with clients to help them prepare, and we encourage all financial institutions to act without delay. We fully expect practical issues and questions to be raised during the implementation and auditing phases, and further evolution of the guidance is quite likely. Financial service organizations need to start assessing the implications of these approaches sooner rather than later.
Thank you to Protiviti Associate Director Benjamin Shiu for his contributions to our CECL and IFRS 9 materials as well as our webinar.