Credit unions and other not-for-profit entities will have toapply new credit loss rules for their fiscal years beginning afterDec. 15, 2019, the Financial Accounting Standards Boardannounced.

The announcement, which came after the FASB's Nov. 11 boardmeeting, also said public business entities will have to follow therules for their fiscal years beginning after Dec. 15, 2018 – oneyear sooner. Entities can choose to adopt the rules before that ifthey wish, once the FASB issues a final update.

In the works since 2012, the rules incorporate a currentexpected credit loss methodology, which could fundamentally change how credit unions, banks and other financialinstitutions calculate their loan loss reserves and even alterday-to-day operations for credit departments.

The new methodology encourages financial institutions to, amongother things, take a forward-looking approach to loans andrecognize possible credit losses earlier, accordingto Tim McPeak, an executive risk-management consultant forSageworks. In an analysis published in March by Deloitte, anentity would recognize its estimate of contractual cash flows notexpected to be collected on a financial instrument as anallowance.

The analysis also said the CECL model would apply to most debtinstruments, trade receivables, lease receivables, reinsurancereceivables that result from insurance transactions, financialguarantee contracts and loan commitments.

“There are certainly things that your credit union can do now toprepareand get ahead of the curve,” McPeak said. “The best way toprepare for CECL is to proactively gather loan level data for theportfolio. This would entail collecting and storing data such as aloan balance, segmentation for the loan, risk rating, charge-offsand recoveries associated with the loan, partial and full, as wellas loan duration. Building up this historical archive of detaileddata will give credit unions the flexibility and resourcesnecessary to adjust their models and use data that's representativeof their own institution.”