Understanding the new current expected credit loss (CECL) regulation, how it impacts an organization, and how to go about implementing and managing a response program will be critical for firms carrying financial assets covered by the accounting standard update. Companies will need to understand the history and lifecycle of their data and processes, and engage finance, technology, risk, compliance, and audit, to ensure a successful outcome.
Below are six best practices for designing and implementing an effective CECL response.
1. Readiness Evaluation
The first thing any bank has to do in its response to CECL is evaluate its current state of readiness.
2. Implementation Roadmap
Evaluating where a financial services company stands today and where it needs to be in relation to CECL is of paramount importance in the early phase of the company’s compliance. Putting together a coherent roadmap that lays out concrete projects to be undertaken will allow the company to mount a coordinated response across multiple functions.
3. Data Stewardship
The basis for any response to CECL will be a thorough analysis of reference and transaction-level data for loans and other covered instruments. With an understanding of the company’s data in place and a plan for addressing any shortcomings, the company will have a solid foundation for complying with CECL.
4. Program Management
A strong response to CECL will require the integration of different PMO groups, but also have a separate and distinct focus on the new regulation. An attempt to decentralize the management of this program and focus on individual functions will invite a disorganized response, and will likely lead to missed deadlines and incomplete requirements.
A company will need to manage its integrated response to this rule very efficiently and transparently in order to meet deadlines set forth by the FASB. Existing PMO groups at the company will have an important role to play in organizing individual projects or group contributions to projects, but a standalone program management office reporting directly to senior management will be required to oversee a truly effective response to CECL.
5. Requirements Gathering
For each of the technical work streams involved in a company’s CECL response, requirements will need to be defined and vetted with key stakeholders across the organization.
Companies will likely have in-house resources who are tasked with creating some or all of these requirements in a normal project. However, having dedicated resources who can write and manage requirements for an entire program will help ensure continuity between different functions and phases. As requirements grow and change, trying to address them with possibly dozens of different business analysts across groups could bring a program to a standstill. Companies will benefit greatly from having individuals who are tasked with writing requirements at a program level.
6. Testing Support
Each phase of a company’s CECL response will have to undergo rigorous testing to ensure that all the regulatory requirements are met.
As with requirements definition, having testing support resources that are dedicated entirely to CECL will ensure consistency of methods, documentation, and reporting across all of the affected silos. Integrating existing testing teams into an overall test support structure will allow the company to leverage its skills with proprietary databases and software, while simultaneously enforcing a unified approach to CECL testing.
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.