So, you can now breathe a little easier, just a little, with the Financial Accounting Standards Board (“FASB”) officially delaying Current Expected Credit Loss (“CECL”) implementation to fiscal years beginning after December 2021. Basically, the credit union will need to move from estimating Allowance Loan and Lease Losses (“ALLL”) based on averages of historical losses (that is, looking in the rear-view mirror) to developing future predictive models to estimate loan losses and to set loss reserves in 2022. This must be done for each individual loan booked, on the day the loan closes, and ongoing throughout the loan.
The good news is that it seems that the FASB will allow credit unions the flexibility to choose a model that ranges from simple to very complex to estimate loan losses to satisfy the regulators. Proactive credit unions/CFOs who are desiring control and some flexibility in the estimation of ALLL should already be on their way to collecting CECL data, understanding it and reviewing their current loan portfolio strategy under CECL.
The bad news is that whichever CECL model you choose it will most likely require a one-time capital adjustment after December 15, 2021, for 2022. The size of that adjustment varies based on how much data the credit union has for its model. Planning and forecasting the required capital investment should start as early as possible to have the needed capital in place, giving adequate time to finance the capital outlay.
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