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Financial Statements and Disclosures under CECL

Entities must first include the new CECL disclosures in their financial statements and regulatory reports (e.g., the quarterly call report), commencing with the aforementioned effective dates. There is no separate filing requirement for CECL. The structure and granularity of an entity’s income statement and balance sheet does not to change, as the details of the CECL models are presented through financial statement disclosures.

Much of the difference in the disclosures relates to changing terminology. For example, the disclosures will no longer reference “impaired loans” but instead will indicate “expected credit losses for all loans and held-to-maturity debt securities.” In a similar manner, the “provision for loan and lease losses” will now be referred to as “expense for credit loss.”

Entities are required to make certain disclosures in the period CECL is adopted:

  • Nature of the change in accounting principle, including an explanation of the newly adopted accounting principle
  • Method of applying the change
  • Material effect of adoption on any balance sheet line item, beginning with the first period for which credit loss standard is effective
  • Cumulative effect of change on retained earnings or other components of equity, as of the beginning of first period for which credit loss standard is effective

Entities that issue interim financial statements are required to provide these disclosures in each interim financial statement for the year of adoption and also in the annual financial statements for the period of the adoption.

The ongoing CECL disclosures are to provide an understanding of:

  • Credit risk inherent in a portfolio and how management monitors credit quality of the portfolio
  • Management’s estimate of expected credit losses
  • Changes in the estimate of expected credit losses that have taken place during the period

An entity needs to determine how to disaggregate its disclosed information as above, based on asset classes, risk characteristics, and the entity’s method for monitoring and assessing credit risk. Portfolio segments can be further disaggregated based on factors, such as:

  • Vintage (year of origination)
  • Categorization of Borrowers (e.g., commercial or consumer borrowers)
  • Type of Financing Receivable (e.g., mortgage, credit card, or interest-only loans or finance leases)
  • Industry Sector (e.g., real estate, mining)
  • Collateral Type (e.g., residential or commercial property, government-guaranteed collateral, uncollateralized (unsecured)
  • Geographic Distribution (e.g., domestic, international)
  • Concentrations of Credit Risk

If you are interested in learning more about the rationale and timing for the accounting change, as well as the financial process and system changes required to comply, please download our new guide: Building a Current Expected Credit Loss (CECL) Response Program.

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