What is CECL’s impact on private nonbank companies?
This article provides an overview of how CECL might impact your nonpublic (private company) financial reporting including your numbers and disclosures.
An Overview of CECL
The Current Expected Credit Losses (CECL) model was introduced by the Financial Accounting Standards Board (FASB) through Accounting Standards Update (ASU) No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments."
ASU 2016-13 was issued in June 2016 and it replaced the previous incurred loss impairment methodology with the CECL methodology. The new model requires more timely recognition of credit losses associated with financial instruments.
Effect on Nonbank Entities
Most nonbank entities have financial instruments or other assets (such as trade receivables, lease receivables, and held-to-maturity debt securities) that are subject to the CECL model.
Because financial assets of nonbanks tend to be held for a shorter duration than those of banks, nonbanks will generally be less affected by the new CECL standard.
According to Deloitte, many nonbank entities have disclosed that the impact of the new CECL standard is immaterial to their financial statements or did not disclose the adoption of the new CECL standard at all.
Nonpublic companies may use simpler methods for estimating expected credit losses and making forecasts about the future (as compared to public companies), as long as those methods are reasonable and supportable. They may also have more flexibility in the types of information they consider and the ways they document their estimates.
However, they will still need to comply with the basic principles of the CECL model, including the requirement to estimate expected credit losses over the life of the financial instruments.
Changes in Disclosures
The CECL standard introduces principles-based disclosure requirements, giving entities flexibility to determine the nature and extent of the information to be disclosed.
Entities are required to provide sufficient information to enable users of their financial statements to understand the credit risk inherent in a portfolio, management's estimate of expected credit losses, and changes in the estimate of expected credit losses that have taken place during the period.
Changes in Allowance for Uncollectibles
Under the CECL model, an entity recognizes its estimate of expected credit losses as an allowance, which incorporates forward-looking information and eliminates barriers to the timely recognition of losses under legacy incurred loss models. This is a significant shift from the previous incurred loss model, which only recognized losses when they were incurred.
Effective Dates for CECL Standard
The guidance became effective on January 1, 2023, for private companies. Public business entities that meet the SEC’s definition of smaller reporting companies and have a calendar year-end have the same effective date, January 1, 2023.