The FASB recently announced that it will release thecurrent expected credit loss model in the first quarter of 2016.With the release around the corner, it is important to understandwhat is expected to change from the existing, incurred loss model.From what we know today, the CECL proposal includes several changesincluding forward-looking requirements, which will involve lookingat all expected, future credit losses.

One of the first steps you can take for your credit union is tounderstand the timeline for the expected guidance. Barringadditional changes, it is expected that as of Dec. 15, 2018, theguidance will become effective for public businesses that meet thedefinition of a SEC filer. A year later, on Dec. 15, 2019, theguidance will become effective for non-SEC filers, not-for-profitsand all other entities. Here are a few recommendations to helpready your institution and board.

Here's what credit unions should not donow:

• Panic. Yes, the new model will likely be aprocess and reserve-level change, but credit unions should havetime to plan before the standards are implemented.
• Incorporate expected losses now through methodologychanges. Wait to see the final standard and theregulations before considering changes. It's important to continuecomplying with existing GAAP standards, while planning ahead tokeep pace with the FASB's implementation dates.
• Try to inflate your ALLL, anticipating an increase fromCECL. Regulators discourage building the allowance balancein anticipation of transitioning to CECL beyond those appropriateunder GAAP.
• Keep your board in the dark. Continue yourresearch, and as you begin to develop a plan, think about who fromthe credit union will be involved. Look out for misinformation andkeep your board informed of timeframes and ramifications.
• Nothing at all. Regulators are encouragingpreparation now, ahead of the final release. Stay abreast of theirrecommendations.

Here's what credit unions should do now:

• First and foremost, you should understand and documentwhat is driving credit risk in the portfolio today. Thiswill be important when forecasting expected losses under CECL andalso helps minimize risk in loans you're underwriting today.
• Start cross-department conversation, includingcredit and finance, and any other parties that may be involved.With CECL, there will likely be more collaboration and sharing ofinformation across these teams.
• Capture, archive and incorporate loan-level detail intothe ALLL model. Evaluate what data will be available. Thislikely means reduced dependency on spreadsheets, as it will growmore challenging to live in static and disparate spreadsheets toarchive data in an accessible way.
• Consider the impact of moving to a more robustcalculation – migration analysis, PD/LGD, vintageanalysis. If your existing calculation is set up to rundifferent scenarios, try these alternate loss rate methodologies inparallel as they are closer to what we expect from CECL.
• Be proactive rather than reactive – youultimately want to be better prepared if you need to makeadjustments.

While implementation of CECL is not immediate, it is importantfor credit unions to understand the scope of what CECL may requirefor the institution. For many credit unions, implementation willinvolve cross-departmental cooperation, including operations,credit and compliance teams from the organization. Given the Q1release, we can expect to hear more details from both the FASB andregulators within the first few months of 2016.

Aaron Lenhart is a risk management consultant for Sageworks.He can be reached at 919-851-7474 or [email protected].