CECL webinar: Weighted-Average Remaining Maturity (WARM) method
FINANCIAL REPORTING INSIGHTS |
On April 11, 2019, the Federal Deposit Insurance Corporation, Federal Reserve Board, Financial Accounting Standards Board (FASB), SEC, Office of the Comptroller of the Currency, National Credit Union Administration and Conference of State Bank Supervisors hosted a webinar to address the use of the WARM method for calculating the allowance for credit losses under Topic 326, “Financial Instruments – Credit Losses,” (CECL) of the FASB Accounting Standards Codification. The webinar reiterated that the WARM method is acceptable under CECL, expanded on the FASB Staff Q&A on the topic that was issued January 20, 2019 and addressed specific practice questions regarding application of the WARM method and other CECL-related topics.
The WARM method is similar to the method currently used by many smaller, less complex financial institutions, with a few adjustments required to comply with CECL. The average annual net charge-off rate would continue to be the starting point, but now would be applied to the projected amortized cost basis for each period of the contractual term’s remaining life. This projected amortized cost incorporates estimated paydowns (contractual and prepayments) and excludes assumptions for additional extensions of credit (i.e., new loans, unless reasonably expected troubled debt restructurings). A numerical example was provided in the webinar.
The webinar also addressed factors to consider when determining whether the WARM method is appropriate, including the following:
- Complexity of the pool of assets, including the number of loans in the pool
- Contractual term of the pool
- Extent of loss history available
- Pattern of loss history (e.g., sporadic or predictive)
- Composition of the pool over time
In other words, there may be circumstances where the WARM method is too simplistic and a more sophisticated loss estimation technique or model is more appropriate.
A recording of the webinar is available by completing the webinar registration form. Upon launching the recording, a pdf of the webinar slide deck also is available under “Materials.”
FASB Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, is effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other public business entities, the standard is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. For all other entities, the standard (as modified by ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses) is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted.
Note: Subsequent to the recording of this webinar, the FASB changed the effective date of Topic 326, which is now effective for public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies (as defined by the SEC), for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, it is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. All entities are permitted to adopt early. For additional information on Topic 326, refer to Chapters 4 and 6 of our publication, A guide to accounting for investments, loans and other receivables.