Don’t Let the New CECL Disclosures be an Afterthought

A Look at Disclosure Requirements under the New Credit Loss Standard

Joseph Jalbert, Audit Principal
December 2017

While many financial institutions are trying to figure out where to begin with the new Current Expected Credit Loss standard (colloquially referred to as CECL), an often overlooked aspect of the standard is the new disclosure requirements that will become effective upon adoption. These new disclosures are intended to provide financial statement users with a clearer picture as to the realizability of assets an institution holds at each reporting period, as well as changes in expected credit losses that have occurred during the period, and will result in a number of changes to the disclosures required under today’s standards. Let’s take a look at some of these changes in more detail.

But First. . . Some Definitions

Before getting into the weeds, it is important to understand some of the terms commonly used throughout the new standard (herein referred to as Accounting Standards Codification (ASC) 326). Some of the key terms referenced within ASC 326 and throughout this article include the following:

Portfolio segment – the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses.

Class of financing receivable – a group of financing receivables determined on the basis of both of the following:

  • Risk characteristics of the financing receivable; and
  • An entity’s method for monitoring and assessing credit risk.

Major security type – a group of securities based on the nature and risks of the security.

Credit quality indicator – a statistic about the credit quality of a financial asset.  Examples of credit quality indicators include risk rating, delinquency status, and FICO score.

Purchased financial assets with credit deterioration (PCD assets) – acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer’s assessment.

Financial Instruments Measured at Amortized Cost

ASC 326-20-50 outlines the required disclosures related to financial instruments measured at amortized cost. Such instruments include loans, net investments in leases, and held-to-maturity (HTM) securities. Entities will need to determine the level of disclosure necessary, in light of the facts and circumstances, to satisfy the primary objective of the guidance: to provide financial statement users with sufficient information relevant to an entity’s financial assets and allowances for credit losses without saddling users with trivial data.

Credit Quality Information

The new guidance requires entities to provide information that allows financial statement users to understand how management monitors the credit quality of its financial assets and assesses the quantitative and qualitative risks of the institution’s financial assets. In order to meet these objectives, entities will be required to disclose quantitative and qualitative information, by class of financing receivable and major security type, about the credit quality of financial assets. Such information includes the date or range of dates in which the information was last updated for each credit quality indicator, as well as the amortized cost basis by credit quality indicator. Entities that meet the definition of a public business entity (as defined in the ASC) will also be required to disclose the amortized cost basis within each credit quality indicator by year of the asset’s origination (i.e. vintage year) for up to the past five annual periods (the amortized cost basis of financing receivables and net investments in leases originated prior to the fifth annual period may be presented in the aggregate).

Allowance for Credit Losses

Upon adoption of ASC 326, institutions will be required to disclose information that allows a financial statement user to understand management’s method for developing its allowance for credit losses, the information management used in developing its current estimate of expected credit losses, and the circumstances that caused changes to the allowance for credit losses during the period. In order to achieve these objectives, institutions will need to disclose the following information by portfolio segment and major security type:

  • A description of how expected loss estimates are developed
  • A description of the institution’s accounting policies and methodology to estimate the allowance for credit losses, as well as a discussion of the factors that influenced management’s current estimate of expected credit losses, including:
    1. Past events
    2. Current conditions
    3. Reasonable and supportable forecasts about the future
  • A discussion of risk characteristics relevant to each portfolio segment
  • A discussion of the changes in the factors that influenced management’s current estimate of expected credit losses and the reasons for those changes
  • Identification of changes to the institution’s accounting policies, changes to the methodology from the prior period, its rationale for those changes, and the quantitative effect of those changes
  • Reasons for significant changes in the amount of write-offs (if applicable)
  • A discussion of the reversion method applied for periods beyond the reasonable and supportable forecast period
  • The amount of any significant sales of financial assets or reclassifications of loans held-for-sale during each reporting period

In addition to the information above, institutions will be required to present, by portfolio segment and major security type, a rollforward of the allowance for credit losses for each period presented. This is similar to the requirements under current guidance and includes the following:

  • Beginning balance of the allowance for credit losses
  • Current period provision for expected credit losses
  • The initial allowance for credit losses recognized on financial assets accounted for as PCD assets
  • Write-offs charged against the allowance
  • Recoveries of amounts previously written off
  • Ending balance of the allowance for credit losses

One difference worth noting between current guidance and ASC 326 is that the information above will now need to be presented for net investments in leases and HTM securities as well. Institutions will need to ensure the appropriate systems are in place to capture the necessary information.

Past-Due Status

Similar to current guidance, institutions will be required to provide an aging analysis of the amortized cost basis for financial assets that are past due as of the reporting date, by class of financing receivable and major security type. However, upon adoption of ASC 326, institutions will also be required to disclose their policy for determining when a financial asset is past due.

Nonaccrual Status

Entities will be required to disclose the following information, by class of financing receivable and major security type, related to financial assets on nonaccrual status:

  • The amortized cost basis of financial assets on nonaccrual status as of the beginning and end of the reporting period
  • The amount of interest income recognized during the period on nonaccrual financial assets
  • The amortized cost basis of financial assets that are 90 days or more past due, but are not on nonaccrual status as of the reporting date
  • The amortized cost basis of financial assets on nonaccrual status for which there is no related allowance for credit losses as of the reporting date

In addition to the above, entities will also be required to disclose their nonaccrual policies, including the policies for discontinuing the accrual of interest, recording payments received on nonaccrual assets (i.e. cash basis method, cost recovery method, or a combination of the two methods), and resuming accrual of interest. Policies for determining past-due or delinquency status and recognizing write-offs within the allowance for credit losses will be required to be disclosed as well.

Purchased Financial Assets with Credit Deterioration

For institutions that purchased financial assets with credit deterioration during the period, ASC 326 requires disclosure of a reconciliation of the difference between the purchase price of the financial assets and the par value of the assets. The reconciliation will need to include the purchase price, the allowance for credit losses at the acquisition date, the discount (or premium) attributable to other factors, and the par value. Because PCD assets are treated just like other assets after they are purchased, this reconciliation is the only separate disclosure related to PCD assets.

Collateral-dependent Financial Assets

Under ASC 326, entities will need to describe the type of collateral, by class of financing receivable and major security type, for all financial assets for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Entities will also need to qualitatively describe the extent to which collateral secures their collateral-dependent financial assets, as well as any significant changes in the extent to which collateral secures their collateral-dependent financial assets, regardless of whether the change is due to general deterioration or some other reason.

Off-balance-sheet Credit Exposures

The new standard will require entities to disclose a description of the accounting policies and methodology used to estimate the liability for off-balance-sheet credit exposures and the related charges for those credit exposures. The description should also include a description of the factors that influenced management’s judgment and the risk elements relevant to particular categories of financial instruments. 

Available-for-Sale Debt Securities

ASC 326-30-50 outlines the required disclosures related to available-for-sale (AFS) debt securities and generally retains the disclosure requirements under current guidance; however, modifications will need to be made to reflect the use of an allowance for credit losses and removal of the other-than-temporary impairment (OTTI) model. The intent of the new disclosures is to assist financial statement users in understanding the credit risk inherent in an institution’s AFS debt securities, management’s estimate of credit losses, and changes in credit loss estimates that have occurred during the period.

Under the new standard, entities will be required to present a rollforward of the allowance for credit losses related to AFS debt securities, by major security type, for each period presented. The presentation of this information will be similar to the rollforward for allowances for credit losses related to financial assets measured at amortized cost with a few modifications, as follows:

  • Beginning balance of the allowance for credit losses
  • Additions for securities for which credit losses were not previously recorded
  • Additions from purchases of AFS debt securities accounted for as PCD assets
  • Reductions for securities sold during the period
  • Reductions because the entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis
  • If the entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, additional increases or decreases to the allowance for credit losses on securities that had an allowance recorded in a previous period
  • Write-offs charged against the allowance
  • Recoveries of amounts previously written off
  • Ending balance of the allowance for credit losses

In addition to the above, entities will also be required to disclose their policy for recognizing write-offs, similar to the requirement for financial assets measured at amortized cost. This new requirement results from the removal of the OTTI concept and the concurrent introduction of an allowance for credit losses related to AFS debt securities.

Final Takeaways

The incremental disclosures set forth in ASC 326 are not-so-insignificant and will require thoughtful planning and additional data gathering.  Institutions should review their existing disclosure-related processes and develop a plan to successfully realign such processes with the new disclosure requirements. For those institutions considering the use of software to meet their CECL needs, it is important to ensure the data necessary to prepare the new disclosures can be extracted from the software in a manageable format. Finally, institutions should review their status as a public or nonpublic business entity, as defined in the ASC and interpreted more recently in a Q&A issued by the AICPA, as this will impact the extent of credit quality disclosures required to be presented.

For more information and resources about CECL, visit our CECL webpage or the FFIEC FAQ.

If you would like to discuss these matters further, contact Joseph Jalbert or your BNN advisor at 1.800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.