MEMBER OF ALLINIAL GLOBAL, AN ASSOCIATION OF LEGALLY INDEPENDENT FIRMS 2017 Wolf & Company, P.C.

CECL Workshop

Implementation Considerations

Jim McGough, CPA, CGMA

Introduction

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Jim McGough, CPA, CGMA

Senior Audit Manager

jmcgough@wolfandco.com

mailto:jmcgough@wolfandco.com

Disclaimers

Slides in this presentation are used to facilitate

discussion and are not recommendations

Methods and analysis presented here are not meant

to be comprehensive nor appropriate in all

circumstances

FASB examples and excerpts presented here are not

meant to be comprehensive nor appropriate in all

circumstances

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Agenda

CECL Transition Where to start

Implementation Considerations

Loan pools

Appropriate methodology

Historical loss data

Reasonable and supportable forecasts

Disclosure Considerations

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CECL Transition Where to Start

1. Learn the standard, and understand the basis for

conclusions included therein.

Principles-based standard

Requirements of the standard and best

practices will evolve

Effective for calendar year entities: o 2020 for public business entities (PBE) that are SEC filers,

including interim periods

o 2021 for other public business entities, including interim periods

o Dec 31, 2021 for all others

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CECL Transition Where to Start

2. Establish your working group, including

professionals outside the accounting function

such as lending, IT, risk management.

CECL is a critical estimate for the senior

management team

Delineation of roles and responsibilities for

personnel involved in the estimation process

When to involve internal audit?

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CECL Transition Where to Start

3. Develop your project plan, including

governance/oversight and milestone dates.

Define responsibilities

Assess data needs (build and test)

Establish time frames and milestones

Dry/parallel runs

Determine implementation has appropriate resources

and priority

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CECL Transition Where to Start

4. Incorporate internal control considerations along

the way to achieve design effectiveness

Written policies and procedures

Completeness and accuracy of data

Management review and approval

Process must hold up under a quarterly frequency

Outsourced model might be in scope of supervisory

guidance for model risk management.

Can the estimate be validated/audited?

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CECL Transition Where to Start

5. Communicate with your auditor and primary

regulator.

Scalability of the model exposes the bank to regulatory

interpretation

Regulatory agencies will develop supervisory guidance

to clarify expectations but will not provide an approved

model or example calculation

Best practices will evolve

Conclude on PBE status with external auditor so there

are no surprises with effective date

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Implementation Considerations

Determine loan pools (those with similar risk

characteristics)

Identify an appropriate methodology for each loan pool

Obtain sufficient historical loss data

Develop reasonable and supportable forecasts

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Loan Pools

Loan pooling is a critical decision point; impacting all

subsequent actions

Does not prescribe a unit of account, but does require

pooling of assets with similar risk characteristics.

Loan segments utilized for current GAAP or call report have

to be reevaluated

Excessive aggregation/disaggregation may be problematic.

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Loan Pools Risk Characteristics

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In evaluating financial assets on a collective (pool) basis, aggregate financial

assets on the basis of similar risk characteristics, which may include

any one or a combination of the following (the following list is not intended to

be all inclusive):

a. Internal or external (third-

party) credit score or credit

ratings

b. Risk ratings or classification

c. Financial asset type

d. Collateral type

e. Size

f. Effective interest rate

g. Term

h. Geographical location

i. Industry of the borrower

j. Vintage

k. Historical or expected credit loss

patterns

l. Reasonable and supportable

forecast periods

Loan Pools Where to start

Using your loan footnote consider the list of risk attributes in

the ASU for each segment:

Identify 2 to 3 primary risk characteristics and consider if these are

generally consistent within the segment

Are actual losses significant?

Other than ALL estimate, does management evaluate the loans at a

different level?

Is the loss emergence period known?

Can expected loan life be estimated for the segment as is?

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Loan Pools Exclude Certain Loans

Estimated credit loss for an asset should be measured

individually if there are no similar risk characteristics with

other loans.

Practical expedients (FV of collateral) exist for:

Collateral-dependent loans (borrower experiencing financial

difficulties and repayment expected through sale or operation of the

property)

Loans secured by collateral maintenance provisions

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Appropriate Methodology

GAAP requirement is explicitly scalable and allows

preparers to develop estimation methods that are

appropriate and practical for their circumstances.

One impairment model but many methods

Methodology by loan segment should be

determined early because relevant data and

software needs may vary.

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Appropriate Methodology

FASB concluded that different outcomes for expected

credit losses are acceptable, given different levels of

complexity and sophistication.

Principles based

Scalable

FASB provided examples that illustrate implementation in a

noncomplex environment. (Example 1 in the ASU)

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Appropriate Methodology

Considerations for scalability:

What is the entitys strategic plan and who will be relying on the financial

statements now and in the immediate future?

Does the primary banking regulator classify the entity as a smaller, less

complex institution?

Would the cost of a more complex methodology exceed the benefits? The

result may not be better, and model/error risk may be elevated.

Is a sophisticated model required or desired for any segment based on the

nature of the loans and relevant loss history?

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Historical Loss Data

An entitys loss history loss remains as the starting point

and generally provides a basis for expected credit

losses.

GAAP does not specify a particular methodology for

determining historical credit loss experience. That

methodology may vary depending on the size of the entity,

the range of the entitys activities, the nature of the entitys

financial assets, and other factors. [ASU 326-20-55-2]

The loan segment and the chosen method will determine the

data needs.

Historical data is still adjusted using qualitative factors

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Reasonable and Supportable Forecasts

Identify risk drivers for each loan segment

For example, real estate values and unemployment rates for mortgage loans

Q-Factor analysis will document whether historical loss data requires adjustment

based on the forecast for these drivers.

Entities are required to adjust for reasonable and supportable forecasts of the

future, by adjusting historical loss information for future expected events that

are not reflected in historical losses.

For periods where an entity is unable to support its forecast, it is required to

revert to historical loss information.

Consider consistency with other forecasts within the entity (ALM, risk

management, MSR valuation, budget, capital planning, other loan segments).

Some entities may begin with external forecasts (e.g. Federal Reserve) and

adjust to what management foresees in its area of operations.19

Reasonable and Supportable Forecasts

The adjustments for current conditions and reasonable and

supportable forecasts may continue to be qualitative, similar

to the approach applied by many institutions today.

More robust quantitative models and/or greater segmentation may

result in a smaller qualitative component, depending on the

circumstances.

Q-Factor adjustments may be more significant because of the life-

of-loan measurement period.

Qualitative analysis may not always be directionally consistent

with current trends/events.

For example, an increase in delinquency rates may have been

previously considered/anticipated when estimating expected credit

losses.

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CECL Disclosures

Disclosures are similar to current GAAP but expanded

Credit quality indicators (CQI) by class of financing receivables

Disclose amortized cost by vintage for 5 years

For purchased assets use issue date, not date acquired

Not required for non-PBEs

Not required for trade receivables or revolving lines

Credit quality indicators (CQI) by major security type

Vintage information is not required

Rollforward of ACL by loan segment and major security type

a. Beginning balance

b. Provision for expected credit loss

c. Initial allowance for PCD assets (i.e. gross-up recording)

d. Write-offs

e. Recoveries of write-offs

f. Ending balance

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CECL Disclosures

Example CQI disclosure by vintage:

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CECL Disclosures

PCD Assets In period acquired: disclose purchase price, ACL at acquisition, non-credit

discount/premium, and par value

Collateral-dependent financial assets Describe the type of collateral by class of financing receivable and major security type.

Qualitatively describe the extent to which collateral secures these assets and

significant changes in coverage during the period.

Off-balance-sheet credit exposures Policy, methodology and charges during period

Past-due loans (no change)

Nonaccrual loans (no change)

TDRs (no change)

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CECL Disclosures

How estimates are developed by management

Policies and methodology used and discussion of factors including:

Past events, current conditions, reasonable and supportable forecasts

Identify changes in methodology or policies, reason for change, and quantitative effect

of changes

Risk characteristics for each segment

Changes in factors that influence the current estimate and reason for change

Reasons for significant changes in the amount of write-offs

Reversion method applied for periods beyond forecastable period

Significant purchases, sales, reclassifications of financial assets relevant to ACL

estimate

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Questions

Thank you!

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Jim McGough, CPA, CGMA

Senior Audit Manager

jmcgough@wolfandco.com

mailto:jmcgough@wolfandco.com