It May Not be Just Your Loan Policy That Needs a CECL Update

Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses, issued in June 2016 changed the accounting for impairment of financial assets and certain other instruments.  While much time and other resources have properly been expended to implement a suitable yet affordable model to effectively implement the Current Expected Credit Loss (CECL) model for loan portfolios, the ASU also contains requirements for debt securities.

In ASU 2016-13, the Financial Accounting Standards Boards reasoned that available-for-sale (AFS) securities were not subject to the CECL model as AFS securities are currently carried at fair value and any impairment is already recognized through a charge to income.  Additionally, these securities are measured on an individual basis and therefore, would not fit in the CECL model of pooled assets.

Held-to-maturity securities, however, can be grouped into pools of similar securities by issuer, term, rate and other characteristics.  Below are the key differences between current accounting requirements and the new CECL regime:

Current Accounting Guidance

New CECL Standard

Losses measured on the Other-than-temporary impairment measurement

Losses measured using lifetime expected credit losses

Credit losses reduce amortized cost basis

Credit losses charged to allowance

Measures HTM securities on an individual basis

Measures losses on a collective assessment with similar assets

Evidence of loss based on deterioration of credit quality probable at acquisition (Purchased Credit Impairment)

Evaluation of loss based on credit quality at origination (Purchased Credit Deterioration)

Banks should consider an update to Investment and other ALCO policies to comply with the new requirement.