M&A must move to address CECL's imminent impact

New KPMG article calls for swift action by dealmakers in meeting requirements of CECL accounting methodology taking effect Jan 1.

CECL will have a big impact on M&A starting early in 2020

On January 1, 2020 the Current Expected Credit Loss Methodology (CECL) comes into effect for SEC filers that are larger than (as defined) ‘Small Reporting Companies.' This new accounting methodology has significant implications for mergers and acquisitions. While CECL has been a consideration in M&A transactions for several years already, it has not been reflected in transaction pricing or other valuation factors. This is about to change. Companies must be prepared.

New thought leadership from KPMG, “Preparing for M&A in a CECL world," discusses the key considerations for acquirers and targets and how they can best address the effects of the new methodology.

CECL requires entities to forecast expected credit losses for assets measured at amortized cost and record those losses on Day 1 of origination or acquisition. If the asset is a loan or other financing receivable, the acquirer is required to record the purchase of those assets at fair value in line with current accounting but then simultaneously model expected credit losses over the remaining contractual life of the acquired asset and record that full loss on the balance sheet and income statement. This new requirement impacts not just the accounting for acquired assets but commercial considerations such as pricing and how lifetime losses would affect the return on investment.

In KPMG’s 2019 CECL Survey, most respondents appear to believe that CECL will result in a 0%-60% increase in the allowance for credit losses as recorded today, with the average for those who expect CECL will cause an increase, at 29%.

As a trusted advisor on CECL, KPMG has deep practical understanding and industry insights and experience to help organizations implement CECL. With the January 2020 deadline fast approaching, the time to act is now.