Credit Unions Face Challenges Identifying Credit Losses on AFS Debt Securities

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To the chagrin of many, CECL is finally upon us. Credit unions will need to start reporting CECL beginning this year with their March 31 Call Reports. And while the CECL credit loss approach does not apply to available-for-sale (AFS) debt securities, the financial accounting standard – ASU 2016-13 (Topic 326), which issued CECL – did make targeted changes to GAAP that eliminates the concept of Other-Than-Temporary Impairment (OTTI) and requires credit losses on AFS debt securities to be recorded in an Allowance for Credit Losses (ACL). ACL requires credit unions to estimate and record expected credit losses on financial assets, including debt securities classified as AFS. Without the right tools and support, that’s a tall order.

Prior to ACL, OTTI only required credit unions to recognize a credit loss on debt securities if it was considered other-than-temporary, meaning it was expected to be long-lasting and result in a permanent reduction in value. Under OTTI, credit unions only had to recognize credit losses if they intended to sell the security or if it was more likely than not that they would be required to sell it before recovery.