Pub. 6 2015 Issue 3

28 By David Ruffin and Randal Rabe Is CECL For Real? Promo: David Ruffin and Randal Rabe Describe How to Prepare for Major Changes to the ALLL. The Financial Accounting Standards Board (FASB) is expected to release its final standard on accounting for credit losses before the end of 2015. The new approach is called “CECL” (Current Expected Credit Loss) and will fundamentally change the Allowance for Loan and Lease Losses (ALLL) concept as well as the methodology of calculating the ALLL. T his article is designed to help banks begin to understand and prepare for this significant and inevitable change, and while this article will not address the existence of other “rumored creatures”, CECL does appear to be for real! What is CECL and how is it different than today’s ALLL? Simply put, the current ALLL model is an income-statement driven approach that matches losses against the time period in which they occur. Under current method- ology, a bank’s allowance is its point-in- time estimation of “probable incurred” credit losses in the portfolio that have not yet been charged-off. These loss estimates are typically based upon a one to two year loss emergence period. The proposed current expected credit loss model (CECL), on the other hand, is much more forward-looking. CECL is a balance sheet driven approach that aims to estimate the “expected” credit loss associated with contractual cash flows that the Bank does not expect to collect over the remaining life of a loan. Why will reserves most likely increase under CECL? There are two fundamental reasons for a likely increase in your ALLL reserve under CECL. First, the threshold for recognizing a reserve will be dropped sig- nificantly. Today, we only recognize losses that are probable, either specific reserves on impaired loans or general reserves