Where Is Your Financial Institution in the CECL Adoption Process - Top Five Takeaways from DHG’s CECL Roundtable.

On Sept. 5, 2019, DHG hosted a roundtable in Harrisburg, Pa., inviting representatives from several banks actively involved in the current expected credit loss (CECL) implementation process to discuss trending topics for the CECL standard. The new standard replaces the incurred loss impairment methodology in current Generally Accepted Accounting Principles(GAAP) with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates.

While the standard is currently effective for fiscal years beginning after Dec. 15, 2019, for U.S. Securities Exchange Commission (SEC) filers and fiscal years beginning after Dec. 15, 2020, for other entities, in July 2019 the FASB proposed changes to the effective date of the standard. Further, on Oct. 16, 2019, the FASB approved its proposal to delay the effective date for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities, to fiscal years beginning after Dec. 15, 2022, and issued a final Accounting Standard Update (ASU) on Nov. 15, 2019.

The overarching theme during the roundtable was the proposed delay of the standard’s effective date for smaller reporting companies from 2020 to 2023 – mainly, would companies benefit from proceeding with implementation and choose early adoption, or wait to adopt on the new effective date? Although banks have been diligently working and preparing to implement CECL on Jan. 1, 2020, (before the delay) most banks in attendance expressed a preference to wait until the new effective date rather than adopt early. A small minority would choose early adoption as they feel they are ready to proceed and would rather not continue with implementation efforts for the next three years – as such, a general sense of CECL fatigue seems to be shared amongst CECL preparedness teams. For many, the decision for waiting to adopt is due to the fact that they would like to see how the standard impacts larger entities who will adopt on Jan. 1, 2020, as they feel there is much to be learned from the early adopters. Because the effective date of the standard is further in the future, the ability to predict how the economy will fare between now and then becomes more difficult. Should there be a downturn, any loan loss reserves as a result of such economic change would be recorded on an entity’s income statement, whereas waiting to adopt would bundle those losses into the CECL transition adjustment through retained earnings.