The delay in implementing the FASB’s new CECL (Current Expected Credit Losses) accounting model ensures former Wave 1 institutions remain compliant by 2020, making it imperative for financial institutions to continue apace with their preparations.
And while the second bucket, which now includes all former Wave 2 and 3 and smaller reporting companies (SRCs), are pushed back to 2023, this gives these institutions the opportunity to optimize their approaches to the regulation.
To date, industry concerns about the CECL standard have been focused on a limited portion of the CECL process, with a focus on two of its six major steps. Specifically, these relate to CECL’s requirements around economic forecasts and the ECL calculation itself which is expected to create unnecessary volatility. Whether that’s the case is open to debate, but it’s nonetheless important to note that most core elements of the process are consistent with current industry best practices and therefore worthy of implementing regardless of CECL’s final form.
Furthermore, it’s clear that auditors and regulatory examiners have accepted the remaining four of CECL’s six steps (Data Management and Process Governance, Credit Risk Assessment, Accounting, and Disclosure and Analytics) and will not ignore them in future audits and exams. Financial institutions that choose to keep their pre-CECL process for these steps do so at their own peril, falling behind competitors, or increasing costs in a late rush to compliance. Instead, strategically minded institutions are forging ahead with those aspects of CECL that have been identified as consistent with best practice.
As you know, discussions over the impact of the CECL standard continue, even as Bucket 2 filers now have until 2023 to comply. More changes are expected as the impacts from CECL filings are analyzed. Unknown changes and a three-year deadline could mean procrastination. However, acting now to build a framework designed to handle inevitable regulatory changes will give you the opportunity to optimize your risk management processes and your approach to future regulations.
By adopting CECL practices, institutions can improve their risk assessment and mitigation strategies, and grow the business while balancing risk and return. But more widely, institutions can align execution across the organization, at the same time engaging management and shareholders.
As you build your CECL compliance program, it’s important to look beyond a point solution or just an accounting solution to automate your processes – these may leave important gaps in your overall program. Look for a solution that will help you build a better risk management process for the long-term so that you can use the CECL results to add value and make better strategic business decisions.
Wolters Kluwer ‘s OneSumX CECL enables you to:
- Define data requirements and sourcing
- Carry out credit risk assessment
- Calculate and process CECL
- Create a scalable, flexible and auditable framework
- Fulfill disclosure requirements