Challenges loom for corporate entities with CECL
Challenges loom for corporate entities with CECL
Insight

Challenges loom for corporate entities with CECL

As time is running out to implement CECL, corporate entities can take benefit from lessons learned during IFRS 9 implementation.

Manufacturers, consumer goods companies, and many other corporate entities are significantly impacted by a new accounting standard that they are also running out of time to implement.

The new standard is known as CECL (Current Expected Credit Loss), and its impact on financial institutions has been widely discussed since its release by the Financial Accounting Standards Board (FASB) in June 2016.

As discussed in a new KPMG report, entitled “Don’t underestimate the impact of CECL on corporate entities,” CECL also significantly impacts how non-financial services entities calculate their credit loss reserves. The report explains that corporates should be aware of the impacts CECL will have for accounting for debt securities, in-house financing receivables, net investment in finance leases, contract assets (arising from ASC 606 transactions), and other asset types.

Released as part of “ASU 2016-13 Financial Instruments—Credit Losses (ASC 326),” CECL replaces current US GAAP’s incurred loss models for financial assets measured at amortized cost. Under CECL, entities are required to measure lifetime expected credit losses for financial assets measured at amortized cost at the reporting date, calculated based on historical loss experience, current conditions, and reasonable and supportable forecasts.

CECL calls for a major shift in perspective for corporates because it requires recognition of expected credit losses from a forward-looking perspective. Corporate entities will also need to review their governance framework and oversight processes and enhance or create internal controls in keeping with CECL’s requirements for processes, changes in financial reporting, and the new data.

With little or no experience forecasting or modeling credit risk, and potentially insufficient data available to do so, corporates are facing a complex accounting change challenge within CECL. This challenge is similar to what entities faced when implementing IFRS 9, the international standard for accounting for financial instruments, which was announced in 2013.

The KPMG report notes that as entities implement CECL, they can benefit from valuable lessons learned during IFRS 9 implementation:

  • Starting early was not early enough! Some entities started as early as three years ago and reported they should have begun much sooner
  • Data was significantly harder to obtain than imagined
  • Developing and refining models was more time consuming than planned
  • Meaningful refinement to inputs following testing and parallel runs caused anticipated further delays
  • Disclosures should not be pushed to the end of the implementation.

Learn the steps you need to take to comply with CECL in “Don’t underestimate the impact of CECL on corporate entities.”