The Financial Accounting Standards Board has finalized its credit loss standard, Accounting Standards Update 2016-13—Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard marks the end of accounting for credit losses using the Incurred Credit Loss model and replaces it with the Current Expected Credit Loss (CECL) model. The standard will have a significant impact on financial institutions. Additionally, it will apply to most debt instruments, trade receivables, lease receivables, reinsurance receivables, financial guarantee contracts and loan commitments.
Since the FASB did not restrict the type of methodologies institutions can use when implementing the new standard, I recommend that CPAs working at financial institutions, along with CPAs with financial institution clients, begin reviewing the different models now. You will want to consider the specific portfolio makeup of your or your clients’ institutions when deciding which method will work best. Here are some of the more common models currently in use by financial institutions that can be modified and used under the new standard: