Large corporations have had to address one new accounting standard after another in recent years, and 2020 will be no exception.
Ladies and gentlemen, welcome to the new standard for Current Expected Credit Losses — otherwise known as CECL.
CECL will be 2020’s big honking new accounting standard that companies struggle to implement. It goes into effect on Jan. 1, and requires firms to implement a new methodology to calculate expected credit losses over the lifetime of financial instruments said firms carry on their books.
Those calculations will be a blend of historical experience plus forecasts based on reasonable evidence and analysis of current conditions. Broadly speaking, CECL is likely to make a company’s estimated credit losses more precise in any single quarter, but also more volatile across many quarters — kinda like what happened with the new standard for revenue recognition introduced in 2017.
Suffice to say that CECL is complicated, so Calcbench will be following disclosures and analyzing data all through the coming year. Meanwhile, we’ve already done some preliminary work and have a few pointers for you now.
First, you can always visit our Interactive Disclosures Page and just search for “CECL.” We did, and found hundreds of results in the S&P 500 for third-quarter 2019 filings alone.
For example, American Express ($AXP) said that based on preliminary testing, CECL could lead to a significant increase in reserves for credit losses:
The results of those preliminary simulations continue to indicate that our total reserves for credit losses related to our Card Member loans and receivables portfolios could have a net increase between 25 percent and 40 percent, with an increase in reserves of between 55 percent and 70 percent related to our Card Member loans portfolio and a decrease in reserves related to our Card Member receivables portfolio, all of which is based on the comparison of preliminary CECL estimates as compared to the incurred loss model applied today.General Motors ($GM), meanwhile, had this to say:
Upon adoption, we expect to record an adjustment that will increase our allowance for credit losses between $700 million and $900 million, with an after-tax reduction to Retained earnings between $500 million and $700 million. The amount of the adjustment is heavily dependent on the volume, credit mix and seasoning of our loan portfolio.
And PNC Financial ($PNC) devoted almost an entire page to discussing CECL. The key part was this:
The adoption of the CECL standard could result in an overall [allowable credit losses] increase of approximately 20 percent, as compared to our current aggregate reserve levels. The overall change is primarily due to the difference between current loss reserve periods versus the estimated remaining contractual lives, as required by the CECL standard. We believe that given current conditions, our consumer loss reserves will increase significantly, while our commercial loan reserves will decrease slightly. Additionally, the CECL ACL could produce higher volatility in the quarterly provision for credit losses than our current reserve process.
CECL will foremost affect companies that carry a lot of financial instruments or extend credit to customers. So expect banks, insurers, and other financial firms to have lots to say about CECL; and also businesses with significant customer financing operations — like General Motors, which is why we included the company above.
Allowances for loan losses are listed on the balance sheet, so you can always research a firm using our Company-in-Detail page to find its estimated loan losses. Or use our Multi-Company page to search for loan-loss allowances and then use our world-famous trace function to see the underlying disclosures for more detail.
You can also search for ASU 2016-13, which is the formal name for CECL. Typically companies will mention new accounting standards in their Significant Accounting Policies disclosures, but not always. When we skimmed the S&P 500, we found CECL discussion in the Management Discussion & Analysis, Basis of Presentation, and even in a few earnings releases.
So you’re best served by using our text search to look for the specific standard, regardless of where any specific company might place its disclosures.
That’s all for now. As we said, CECL will be the big financial reporting issue for 2020, so we’ll have lots more to say on the subject throughout next year.
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