Impact of CECL on specialty finance companies
The new credit impairment model—released by the Financial Accounting Standards Board (FASB) and commonly referred to as the current expected credit loss, or CECL, model—will change the way specialty finance companies account for credit losses. Specialty lenders should begin their preparations now for what could be a number of major changes to the way they account for credit losses.
A number of new requirements could have a significant effect for most specialty finance companies, including:
- Recognition of life of asset expected credit losses on Day One
- Transition from an incurred loss model to an expected credit loss model
- Adjustment of historical loss experience for current conditions, and reasonable and supportable forecasts
- Adoption of special rules for purchased loans with credit deterioration
- Recognition of all subsequent changes in the allowance for credit losses in earnings through increases or decreases in credit loss expense
In this short presentation, learn about the effective dates for different entities, see examples of static pools and vintage analysis, and learn about key changes in accounting for credit losses for purchased loans with credit deterioration.
Note: Subsequent to the recording of this video, the FASB changed the effective date of the CECL model. The CECL model is 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 more a deeper dive into CECL, check out our recorded webcast, Understanding FASB's new credit impairment model and Chapters 4 and 6 of our publication, A guide to accounting for investments, loans and other receivables.