Credit unions and other not-for-profit entities will have to apply new credit loss rules for their fiscal years beginning after Dec. 15, 2019, the Financial Accounting Standards Board announced.
The announcement, which came after the FASB’s Nov. 11 board meeting, also said public business entities will have to follow the rules for their fiscal years beginning after Dec. 15, 2018 – one year sooner. Entities can choose to adopt the rules before that if they wish, once the FASB issues a final update.
In the works since 2012, the rules incorporate a current expected credit loss methodology, which could fundamentally change how credit unions, banks and other financial institutions calculate their loan loss reserves and even alter day-to-day operations for credit departments.
The new methodology encourages financial institutions to, among other things, take a forward-looking approach to loans and recognize possible credit losses earlier, according to Tim McPeak, an executive risk-management consultant for Sageworks. In an analysis published in March by Deloitte, an entity would recognize its estimate of contractual cash flows not expected to be collected on a financial instrument as an allowance.
The analysis also said the CECL model would apply to most debt instruments, trade receivables, lease receivables, reinsurance receivables that result from insurance transactions, financial guarantee contracts and loan commitments.
“There are certainly things that your credit union can do now to prepare and get ahead of the curve,” McPeak said. “The best way to prepare for CECL is to proactively gather loan level data for the portfolio. This would entail collecting and storing data such as a loan balance, segmentation for the loan, risk rating, charge-offs and recoveries associated with the loan, partial and full, as well as loan duration. Building up this historical archive of detailed data will give credit unions the flexibility and resources necessary to adjust their models and use data that’s representative of their own institution.”