Use the extra time to ensure a successful implementation by 2023.
This July, the Financial Accounting Standards Board unanimously voted to propose a delay for the implementation of the current expected credit loss standard for some institutions. This marks the second delay for credit unions, pushing the effective date to January 2023. (Stakeholders may comment on the proposal until Sept. 16.) While this delay may come as a relief for some financial institutions, it’s also important to remember that institutions will be held accountable for the additional time given.
The new CECL standard has been called the “most sweeping change” to bank accounting and, due to its complexity, it can pose significant challenges to financial institutions of all sizes, especially when it comes to data. Rather than wait until 2023, non-public business entities have a unique opportunity to get ahead of the game.
“Financial institutions should be cautious about taking the foot off of the gas pedal, especially if they have already formed a CECL steering committee or started down the path of any type of data gap assessment or building a model or engaging with a third-party solution,” says Regan Camp, Abrigo managing director of advisory services. “Some people are going to embrace any delay as ‘I’m going to hurry up and wait, and we’ll get started a couple of years down the road.’ Then, in three years, they’ll be on the sidelines with their fingers crossed hoping to get additional relief.”
When the first 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.”
A crucial takeaway from the delay is that it is just that: a delay. As of right now, there is no indication of CECL going away completely, so it is important that credit unions and other non-SEC filing financial institutions take advantage of the extra time to ensure a successful implementation by 2023.
Why start now?
Many financial institutions have been in a state of “CECL paralysis,” unsure of where to begin.
“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,” Camp adds.
If credit unions begin now, they will have ample time to complete a fit-gap analysis, 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 that credit unions wait until 2023, the more scrutiny they will garner from auditors, regulators and examiners who have already witnessed the preparations and transitions of large SEC-filing institutions. Rather than stay in CECL paralysis during this relief period, credit unions should take advantage of the flexibility they currently have.
Where to start?
Data is certainly one of the most complex and complicated areas of CECL preparation, so for credit unions and other non-SEC filing institutions that don’t have to comply until 2023, it’s strongly advised to begin data collection now. 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 by Abrigo, 39% said their institution plans to look back five to seven years to gather data, while another 30% 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 that better forecasts are possible and easier to make.
Less than half (43%) believe that they currently have sufficient data to produce meaningful results, and 27% reported that they were confident that they would have to incorporate external data.
One way to get ahead of the data game is to start automating the incurred loss model now. This will help financial institutions accurately store their data during these next few years—which will open up their options for using different CECL methodologies down the road. Additionally, their core integration will already be complete, and they will be able to switch over to CECL with the click of a button, which will increase the ease of running parallel calculations.
The CECL transition does not have to be daunting for credit unions if they develop an adequate project plan. The effective date may appear to be far off, but to have a successful transition that satisfies auditors, regulators and examiners, credit unions must continue moving forward with their preparations during this period of delay.
Kylee Wooten is media relations manager for Abrigo, formerly Banker’s Toolbox, Sageworks, MST, and FARIN. For additional, free resources on where to start and to better assist with your transition to CECL, check out Abrigo’s upcoming webinars.