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

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

Here's what credit unions should not do now:

Panic. Yes, the new model will likely be a process and reserve-level change, but credit unions should have time to plan before the standards are implemented.
Incorporate expected losses now through methodology changes. Wait to see the final standard and the regulations before considering changes. It's important to continue complying with existing GAAP standards, while planning ahead to keep pace with the FASB's implementation dates.
Try to inflate your ALLL, anticipating an increase from CECL. Regulators discourage building the allowance balance in anticipation of transitioning to CECL beyond those appropriate under GAAP.
Keep your board in the dark. Continue your research, and as you begin to develop a plan, think about who from the credit union will be involved. Look out for misinformation and keep your board informed of timeframes and ramifications.
Nothing at all. Regulators are encouraging preparation now, ahead of the final release. Stay abreast of their recommendations.

Here's what credit unions should do now:

First and foremost, you should understand and document what is driving credit risk in the portfolio today. This will be important when forecasting expected losses under CECL and also helps minimize risk in loans you're underwriting today.
Start cross-department conversation, including credit and finance, and any other parties that may be involved. With CECL, there will likely be more collaboration and sharing of information across these teams.
Capture, archive and incorporate loan-level detail into the ALLL model. Evaluate what data will be available. This likely means reduced dependency on spreadsheets, as it will grow more challenging to live in static and disparate spreadsheets to archive data in an accessible way.
Consider the impact of moving to a more robust calculation – migration analysis, PD/LGD, vintage analysis. If your existing calculation is set up to run different scenarios, try these alternate loss rate methodologies in parallel as they are closer to what we expect from CECL.
Be proactive rather than reactive – you ultimately want to be better prepared if you need to make adjustments.

While implementation of CECL is not immediate, it is important for credit unions to understand the scope of what CECL may require for the institution. For many credit unions, implementation will involve cross-departmental cooperation, including operations, credit and compliance teams from the organization. Given the Q1 release, we can expect to hear more details from both the FASB and regulators 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 aaron.lenhart@sageworks.com.

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How to Prep Now for the CECL Q1 Release

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