Why Non-PBEs Shouldn’t Bank on a CECL Delay

Last week, Sen. Thom Tillis (R-NC) introduced a bill, S. 1564, calling for a delay in the implementation of the Financial Accounting Standards Board’s current expected credit loss (CECL) standard. The bill would delay CECL until a “quantitative impact study can be completed to understand its likely effects it will have on the economy.” While FASB pushed back the effective date for non-public business entities (PBEs) in October 2018, from fiscal years beginning after 12/15/2020 to 12/15/2021, FASB officials so far have indicated the board won’t push back the effective dates any further. Here’s the latest indication they won’t delay.

The new CECL standard “represents the most sweeping change to bank accounting ever,” and, due to its complexity, poses significant challenges to financial institutions of all sizes, especially when it comes to data. Rather than wait until 2022, non-PBEs have a unique opportunity to get ahead of the game. When the extension for non-PBEs was passed, Shayne Kuhaneck, assistant director at FASB, said during a CECL implementation webinar, “The consistent message is that data continues to be challenging, so I would recommend not slowing down and I would recommend continuing to collect data and if you haven’t started, to start, and see where your gap is. While you have the extra time, I think it is a perfect opportunity to keep moving forward with your plans.”

According to the 2019 CECL Survey Results, only four percent of institutions with assets under $1 billion have actually completed a true parallel run. “The majority of the banks of this size are going to fall into the private or non-SEC PBE categories, so they are naturally a little farther behind the larger SEC filers,” noted Chris Emery, Director of Strategy and Engagement for Abrigo. Because non-SEC PBEs don’t have to adopt until 2021, or 2022 for private institutions, it is understandable that they are further behind in their preparations, but they must also begin preparations to ensure they’re ready to make parallel runs in 2020.

Why start now?

Many financial institutions have been in a state of “CECL paralysis,” where the institution is unsure of where to begin, or perhaps is holding out hope that there will be additional time to prepare. “Some institutions may think that there is new found time, as perceived in the extension of the effective date for non-PBEs…but the reality is that institutions will not be able to get where they need to go to get this thing implemented and will start running out of time if the transition process is not started,” said Regan Camp, Senior Director of Advisory Services at Abrigo.

If non-PBEs begin now, these institutions will have nearly five quarters to complete a data-fit gap, evaluate measurement options, and more, while still being able to complete a parallel run four quarters before their effective date. Waiting until the effective date nears makes the cost of achieving compliance higher. Examiners expect parallel runs, and the closer institutions wait until 2022, the more scrutiny they will garner from auditors, regulators, and examiners who have already witnessed the preparations and transitions of SEC-filing institutions and PBEs. Rather than stay in CECL paralysis during this extra time, non-PBEs should take advantage of the flexibility they currently have.

Where to start?

Being the most challenging aspect of CECL, data is a good place to begin CECL preparations. This includes assessing and taking stock of what data is currently available and where gaps are in your institution’s data. According to the 2019 CECL Survey Results, 39 percent of those surveyed said their institution plans to look back five to seven years to gather data, while another 30 percent plans to look back eight to 10 years. Two-thirds of survey participants whose institutions’ assets are below $1 billion plan to look back seven years or less. The more data an institution is able to gather, the more likely it is that better forecasts are possible and easier to make. Less than half (43 percent) believe that they currently have sufficient data to produce meaningful results, and 27 percent reported that they were confident that they would have to incorporate external data. Data is certainly one of the most complex and complicated areas of CECL preparation, so for credit unions and other non-PBEs that don’t have to comply until 2022, it’s strongly advised to begin data collection now.

The CECL transition can seem extremely daunting, especially for smaller institutions with fewer resources. And as the experts have noted, the effective date may appear to be a ways off, but in order to have a successful transition that satisfies auditors, regulators, and examiners, institutions must continue moving forward with their preparations. For additional resources on where to start and to better assist with your transition to CECL, check out Abrigo’s Practical CECL Transition Guide.

FASB is scheduled to discuss the topic again on June 5, 2019.