The Financial Accounting Standards Board's Current ExpectedCredit Loss standard replaces the incurred loss model with alifetime expected credit loss estimate. This change will have awide-ranging impact on credit unions' allowanceprocesses, requiring new data elements and new disclosures andanalytics in support of a forward-looking credit lossestimate.

An expected credit loss model represents a fundamental change tothe definition of the allowance, but the transition to CECL willentail more than just incorporating reasonable and supportableforecasts in the reserve. More importantly, allowance-estimationdecisions should not be made in isolation, because estimationapproaches will have consequences for reporting, systems and data,which will all need to change to support the methodologyelections.

With respect to the transition to CECL, the distinction betweencompliance and success is an important one.Achieving CECL compliance means meeting the requirements of thestandard and executing the reserving process on time. Asuccessful CECL implementation, on the other hand, is about morethan just checking a box. Success is about streamlining thereserving process, increasing scalability, and gaining efficienciesin a secure and controlled environment.

Rather than addressing the challenges in isolation, creditunions can ensure a successful CECL implementation by taking aholistic approach – one that considers the integration of credit,accounting, reporting and data. In this article, we discussconsiderations for a holistic approach across three primary areasimpacted by the CECL reserving standard:

• Generating forward-looking credit loss estimates;

• Explaining potentially volatile resultsto stakeholders; and

• Generating application-ready data.

While clearly necessary, CECL-compliant estimation methods –ranging from spreadsheets to complex econometric models – will notbe sufficient for a successful reserving process. Integrating theallowance estimate with the data inputs and reporting in acontrolled and repeatable manner – “productionalizing” the CECLallowance – will be critical to a sustainable reserving process.Additionally, the entire process should be designed with controlsand auditability top of mind!

The reserving process design should include:

• Seamless integration with data, disclosures and analytics;

• Flexibility to perform a variety ofCECL-compliant methods within a controlled framework;

• The ability to apply expert judgment viapost-processing adjustments; and

• The ability to identify and reviewassets evaluated on an individual basis based on borrower-specificfacts, for example, where the practical expedient for collateraldependent assets is applied.

Because CECL expands the information considered in the estimateto include forecasted conditions, the factors driving the change inthe reserve will differ from that of current U.S. GAAP. Considerthis analogy – today, you pull your umbrella out when it israining, but CECL will require you to pull your umbrella out whenthere is a forecast of rain! Therefore, it should come as nosurprise that the CECL reserve will be more volatile than theallowance today. It is for these reasons that credit unions shouldleverage a proper reporting framework that links the changes inexpected credit losses at the instrument level to all changes,including changes in forecasted conditions, credit risk andportfolio composition.

The reporting framework should include:

• Push-button reports for internal management packages anddisclosures that are consistent each reporting period;

• True ad-hoc analytics drillable to theasset level in order to address impromptu questions from internaland external stakeholders;

• Attribution analysis and migrationanalysis enabling comparison between prior and current periodreserves;

• Scenario analysis comparing resultsusing different assumptions and forecasts; and

• Transparency into the reversion tohistorical loss information during the contractual periods beyondthe reasonable and supportable forecasts.

Data is the beginning of all business processes and the commonthread across functional areas of the reserve. Consolidate all datarequirements across modeling and reporting, and identify the leastcommon denominator. Application-ready data – data suitable to beprocessed by models and accessible for reporting and analytics –must be clean, valid and normalized. Finally, integrate data fromthe model inputs to the model results in order to automate flexiblemulti-dimensional reporting. The data framework should include:

• Input controls to ensure appropriate transmission of files andfile integrity;

• Validations to ensure that necessarydata elements are complete, correct and usable;

• Aggregation of instruments forcollective evaluation and identification of assets to be evaluatedon an individual basis; and

• Tracking and maintaining of assetrecords including the source, transformations and ultimate use(i.e., data lineage).

A successful CECL transition requires taking a holistic view ofthe end-to-end reserving process and leveraging the righttools.

Lauren Smith isthe Director of Accounting Policy & Researchat SS&C Primatics. She can be contacted at [email protected].

JohnLankenau is the SVP, Product & Operationsat SS&C Primatics. He can be contacted at [email protected].