The adoption of the Current Expected Credit Losses, or CECL, took effect for calendar year Public Business Entities (PBEs) on January 1, 2020. CECL requires that companies record their expected credit losses on day one over the contractual life of financial assets (financing receivables, trade / loan receivables, contract assets, etc.), and as result broadened the range of data incorporated into the measurement of credit losses to include forward-looking information such as reasonable and supportable forecasts while considering current conditions.
As we approach quarter-end and with the recent COVID-19 (coronavirus) pandemic-related business and economic turbulence, SEC filers with financial assets measured at amortized cost must consider to what extent, if any, the pandemic will have on the collectability of its outstanding receivables.
Although it may be difficult to determine the future economic impact of COVID-19, those companies affected by the pandemic will need to consider and challenge all aspects of their adopted CECL model(s) as of the reporting date, including the following:
- Segmentation / Pooling – Determine whether or not financial assets which were segmented, or pooled, continue to display similar risk characteristics. If not, those financial assets must be re-segmented with other financial assets exhibiting similar risk characteristics or assessed individually for expected credit losses.
- Current conditions and reasonable, supportable forecasts – Assess what adjustments to significant risk factors to account for changes in current conditions and reasonable and supportable forecasts of future economic conditions, including updates to macro and micro economic inputs and assumptions, as a result of the pandemic, need to be incorporated. For many companies, this includes updating the expectations of unemployment trends, geographic impacts of the virus, supply chain disruptions and other economic factors built into forecasts. The level of uncertainty will likely impact all companies, even those with shorter-term receivables.
- Troubled Debt Restructurings (TDRs) / loan modifications – On March 22, the FASB released a statement, Prudential Regulator Guidance Concerning Troubled Debt Restructurings, as a result of the coronavirus pandemic. All companies should refer to this guidance on TDRs and loan modifications for more information.
- Historical data – Evaluate whether judgements made over historical data, or a time period of the data utilized, properly reflects an event that has had similar effects on companies’ financial assets, like that of the current coronavirus pandemic.
- Disclosures – Assess whether changes to qualitative and quantitative financial statement disclosures, including updates for assumptions and inputs for segmentation and reasonable and supportable forecasts of current conditions, would be necessary to enhance the understanding of credit risk within the financial statements.
- Internal control over financial reporting – Management must have controls in place that are designed, implemented and operating effectively for such changes to its CECL model(s), as a result of the pandemic. Additional documentation summarizing such considerations and changes to inputs and assumptions, if any, will be expected by external auditors and examiners.
- Stakeholders – As a reminder, management should include all key stakeholders across the business in its review, challenge and adjustments to its CECL model(s), not just the CECL model owner and reviewer.
As you may be aware, on March 19th the FDIC Chairman, Jelena McWilliams, called on the FASB to allow delays or exceptions for implementing the new accounting standard on expected credit losses. Companies who would elect to delay would revert to their former model of calculating losses on financial assets. As of date, there has been no delay or exceptions for not implementing CECL, and as such SEC filers should continue as planned pre-pandemic.
CFGI continues to have a growing, dedicated team who have implemented and continue to monitor and update CECL for numerous clients. We understand auditor and regulator needs and can assist to ensure you are well prepared during year 1 of CECL implementation.